Avarone Metals Inc. — Management Reports 2021

Jun 28, 2021

MANAGEMENT'S DISCUSSION AND ANALYSIS For the nine months ended April 30, 2021 and 2020

Management's Discussion and Analysis For the nine months ended April 30, 2021 and 2020

Description of Business and nature of operations

Avarone Metals Inc. (the "Company" or "Avarone") incorporated under the laws of the Province of British Columbia on November 3, 1993, is an exploration stage company engaged in the acquisition, exploration and development of precious metals and energy-based resource properties.

The Company entered into an option agreement with Ray-Dor Resources Ltd. (the "Optionor") dated November 15, 2012, as amended on October 28, 2013, and November 24, 2014, ("Agreement"), pursuant to which it has been granted an option to acquire a 100% interest in seven mineral claims known as the Wildnest and Phantom Lake gold properties located in the Flin Flon area of Manitoba and Saskatchewan (the "Claims"). The option agreement on these properties has been in default since December 2015 as required payments have not been made by the Company. The Company is currently searching for a new exploration property.

On January 20, 2016, the Company listed on the Canadian Securities Exchange ("Exchange") while simultaneously delisting from the TSX Venture Exchange. The Company's shares are listed for trading on the Exchange under the symbol "AVM".

This management's discussion and analysis ("MD&A") reports on the operating results and financial condition of the Company for the nine months ended April 30, 2021, and 2020, and is prepared as of June 25, 2021. The MD&A should be read in conjunction with the Company's audited consolidated financial statements for the years ended July 31, 2020 and 2019, which were prepared in accordance with IFRS.

All dollar amounts referred to in this MD&A are expressed in Canadian dollars except where indicated otherwise.

Cautionary Note Regarding Forward-Looking Information

This document may contain "forward-looking information" within the meaning of Canadian securities legislation ("forward-looking statements"). These forward-looking statements are made as of the date of this document and the Company does not intend, and does not assume any obligation, to update these forwardlooking statements, except as required under applicable securities legislation.

Forward-looking statements relate to future events or future performance and reflect management's expectations or beliefs regarding future events and include, but are not limited to, the Company and its operations, its planned exploration activities, the adequacy of its financial resources and statements with respect to the estimation of mineral reserves and mineral resources, the realization of mineral reserve estimates, the timing and amount of estimated future production, costs of production, capital expenditures, success of mining operations, environmental risks, unanticipated reclamation expenses, title disputes or claims and limitations on insurance coverage. In certain cases, forward-looking statements can be identified by the use of words such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved" or the negative of these terms or comparable terminology. In this document, certain forward-looking statements are identified by words including "may", "future", "expected",

Management's Discussion and Analysis For the nine months ended April 30, 2021 and 2020

"intends" and "estimates". By their very nature forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others, risks related to actual results of current exploration activities; changes in project parameters as plans continue to be refined; future prices of resources; possible variations in ore reserves, grade or recovery rates; accidents, labour disputes and other risks of the mining industry; delays in obtaining governmental approvals or financing or in the completion of development or construction activities; as well as those factors detailed from time to time in the Company's interim and annual consolidated financial statements and management's discussion and analysis of those statements, all of which are filed and available for review under the Company's profile on SEDAR at www.sedar.com. Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. The Company provides no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.

Risk Factors

The Company is in the business of acquiring, exploring and, if warranted, developing and exploiting natural resource properties. Mineral property exploration is a speculative business and involves a high degree of risk. There is a probability that the expenditures made by the Company in exploring its properties will not result in discoveries of commercial quantities of minerals. A high level of ongoing expenditures is required to locate and estimate ore reserves, which are the basis to further the development of a property. Capital expenditures to support the commercial production stage are also very substantial.

Matters related to the principal risks faced by the Company have been disclosed in previous MD&As filed on SEDAR and continue to apply to the activity and business of the Company.

Future outlook

The Company is currently searching for a new exploration property and continues to evaluate new mining opportunities. In addition, the Company needs to raise additional capital to fund general working capital requirements and other ongoing commitments.

Management's Discussion and Analysis For the nine months ended April 30, 2021 and 2020

Summary of Quarterly Results

The following is a summary of certain consolidated financial information concerning the Company for each of the last eight reported quarters:

	Total Revenues	Net earnings (loss)	Earnings (loss)
Quarters ended	($)	($)	per share ($)
April 30, 2021	Nil	(44,217)	(0.00)
January 31, 2021¹	Nil	(242,073)	(0.00)
October 31, 2020	Nil	(51,799)	(0.00)
July 31, 2020	Nil	(31,546)	(0.00)
April 30, 2020	Nil	(72,074)	(0.00)
January 31, 2020	Nil	(140,874)	(0.00)
October 31, 2019	Nil	(145,491)	(0.00)
July 31, 2019	Nil	(127,068)	(0.00)

¹ There was a share-based charge of $213,887 for the three months ended January 31, 2021.

There are no general trends regarding the Company's quarterly results and the Company's business of resource exploration is not seasonal, as it can work on its properties on a year-round basis subject to the availability of sufficient funds. Quarterly results can vary significantly depending mainly on the Company's acquisition of mineral rights and exploration activities and whether the Company has granted any stock options or modified the terms of stock options. These are the factors that account for material variations in the Company's quarterly net losses, none of which are predictable.

The Company leases its office space and charges accounting, administration and other office costs to other reporting issuers with common directors and/or officers. The other major factor which can cause a material variation in net loss on a quarterly basis is the change in this arrangement with related companies.

Discussion of operations

Three Months Ended April 30, 2021

During the quarter ended April 30, 2021, the Company reported a net loss and comprehensive loss of $44,217 compared to a net loss of $72,074 during the quarter ended April 30, 2020, representing a decrease in loss of $27,857. The decrease in loss is primarily attributable to the following:

• The depreciation expense for the three months ended April 30, 2021 was $19,436 (2020: $97). Depreciation expense primarily relates to the amortization of right-of-use asset pertaining to the longterm lease for the quarter ended April 30, 2021.
• Salaries and benefits expense for the three months ended April 30, 2021 was $nil (2020: $17,237). The reduction in expense when compared to the corresponding period in the prior year is caused by the Company re-structuring its operations.

Management's Discussion and Analysis For the nine months ended April 30, 2021 and 2020

Other Items

The Company recognized finance costs associated with loans advanced by arms length and related parties of $8,377 for the quarter ended April 30, 2021 (2020: $7,451). The Company also received other income of $28,954 (2020: $nil) during the three months ended April 30, 2021 primarily from rent received from other companies sharing its office space.

In addition, the Company recognised government assistance of $12,851 (2020: $nil) as part of the Canadian governments COVID-19 financial assistance program

Nine months ended April 30, 2021

During the nine months ended April 30, 2021, the Company reported a net loss and comprehensive loss of $338,089 compared to a net loss of $358,439 during the nine months ended April 30, 2020, representing a decrease in loss of $20,350. The increase in loss is primarily attributable to the following:

• Share-based payments for the nine months ended April 30, 2021 was $213,887 (2020: $113,691). The increase in share-based payments was caused by the Company granting 2,675,000 stock options during the period at an exercise price of $0.08 per option. The Company values its stock option grants by using the Black-Sholes method of valuing stock options.
• Salaries and benefits for the nine months ended April 30, 2021 was $nil (2020: $56,456). The reduction in expense when compared to the corresponding period in the prior year is caused by the Company re-structuring its operations.
• The depreciation expense for the nine months ended April 30, 2021 was $55,710 (2020: $290). Depreciation expense primarily relates to the amortization of right-of-use asset pertaining to the longterm lease for the period ended April 30, 2021.

Other Items

The Company paid finance costs associated with loans advanced by arms length and related parties of $25,225 for the nine months ended April 30, 2021 (2020: $18,812). Interest and accretion expenses of $15,890 (2020: nil) were recognized on the lease liability and CEBA loans during the nine months ended April 30, 2021. The Company also received other income of $70,973 (2020: $nil) during the nine months ended April 30, 2021 primarily from rent received from other companies sharing its office space. In addition, the Company recognised government assistance of $12,851 (2020: $nil) as part of the Canadian governments COVID-19 financial assistance program.

Management's Discussion and Analysis For the nine months ended April 30, 2021 and 2020

Liquidity and Capital Resources

The Company has no revenue generating operations from which it can internally generate funds. The Company has financed its operations and met its capital requirements primarily through the issuance of capital stock by way of private placements, the exercise of common share purchase warrants, loans from related parties and third-party short-term loans. As at April 30, 2021, the Company had a working capital deficiency of $1,031,035 compared to $924,864 at July 31, 2020.

The Company had the following promissory notes payable as at April 30, 2021:

	April 30, 2021	July 31, 2020
Promissory note dated February 8, 2017 and due on August 8, 2017, bearinginterest rate of 24%	60,000	60,000
Promissory note dated March 31, 2017 and due on September 30, 2017, bearinginterest rate of 24%	16,500	16,500
Promissory note dated October 10, 2017 and due on April 10, 2018, bearinginterest rate of 24%	25,000	25,000
Promissory note dated October 11, 2019 and repayable on demand, interest free	5,000	5,000
Promissory note dated November 27, 2017 and due on May 27, 2018, bearinginterest rate of 18%	20,000	20,000
Promissory note dated January 21, 2020 and repayable on demand, bearinginterest rate of 12%	23,500	23,500
Promissory note dated January 22, 2020 and due on July 22, 2020, bearinginterest rate of 12%	5,000	5,000
Promissory note dated November 4, 2020 and repayable on demand, bearinginterest rate of 12%	14,300
Promissory note dated December 2, 2020 and repayable on demand, bearinginterest rate of 12%	500
	169,800	155,000

As additional consideration for the promissory notes, the Company must issue to the lenders common shares of $24,300. The shares have not been issued as at April 30, 2021 and are included in share subscriptions. Total interest accrued on the promissory notes as at April 30, 2021 amounted to $116,665 (2020: $91,441) and is included in the accrued liabilities. Promissory notes of $38,300 as at April 30, 2021 are due to related parties. Such promissory notes are unsecured, due on demand and bear interest of 12% annually.

CEBA loans

During the period ending April 30, 2021, as part of the Canadian government funded COVID-19 financial assistance programs, the Company received loans in the amount of $20,000 from the Bank of Montreal (CEBA term loan). The CEBA term loan is due on December 25, 2025. The loan is interest free until December 31, 2022 and bears interest at 5% per annum thereafter. If at least 75% of the loan principal is paid on or before December 31, 2022, the balance of the loan will be forgiven.

Management's Discussion and Analysis For the nine months ended April 30, 2021 and 2020

The benefit of the government loan received at below market rate of interest is treated as a government grant. The loan was recognized at fair value using the Company's incremental borrowing rate of 18% per annum, totaling $7,149. The difference between the initial carrying amount and proceeds received is the value of the grant of $12,851. The Company recognized in income the value of the grant as it incurred the related expenses for which the grant was intended to compensate. The balance of the loans as at April 30, 2021 is $30,334 (2020: $29,134).

Lease liability

The Company is committed to future minimum annual lease payments with respect to office leases expiring January 31, 2024, as follows:

	$
2021	73,140
2022	82,570
2023	17,318
2024	-
	173,028

As of the date of this MD&A, financing for the Company's operations is also potentially available through the exercise of vested stock options and share purchase warrants. See "Summary of Outstanding Share Data". However, there can be no assurance that any of these outstanding convertible securities will be exercised, particularly if the trading price of the common shares on the Exchange does not exceed, by a material amount and for a reasonable period, the exercise price of such convertible securities at some time prior to their expiry dates.

Liquidity outlook

The Company needs to raise additional capital to fund general working capital requirements, exploration commitments and other obligations for the next twelve months. Although the Company has previously been successful in raising the funds required for its operations, there can be no assurance that the Company will have sufficient financing to meet its future capital requirements or that additional financing will be available on terms acceptable to the Company in the future.

The Company has not had a history of operations or earnings and its overall success will be affected by its current or future business activities. The continued operations of the Company and the recoverability of expenditures incurred to earn an interest in resource properties are dependent upon the existence of economically recoverable reserves, securing and maintaining title and beneficial interest in the properties, obtaining necessary financing to explore and develop the properties, and upon future profitable production or proceeds from disposition of the resource properties. See "Risk Factors".

Management's Discussion and Analysis For the nine months ended April 30, 2021 and 2020

Transactions with Related Parties

During the nine months ending April 30, 2021, and 2020, the Company entered into the following transactions with related parties:

	Nine month period ended
	April 30, 2021	April 30, 2020
Income: office, rent, and administration	93.291	20,809
Expense: professional fees	(22.500)

Part of office, rent and administration expenses represents reimbursements for expenses; and therefore such amounts are presented on a net basis in the statement of comprehensive loss against the related expense. The remainder is presented as Other income the statement of comprehensive loss.

The Company's key management personnel have authority and responsibility for planning, directing and controlling the activities of the Company and consists of its Directors, Officers, Chief Executive Officer and Chief Financial Officer.

	Nine month period ended
	April 30, 2021	April 30, 2020
		$
Management fees	67,500	67,500
Share-based payments	179.905	$\overline{\phantom{a}}$
	247.405	67,500

The following related party amounts were included in liabilities:

	April 30, 2021	July 31, 2020
A company controlled by an officer of the
Company	681.309	555,475

Critical Accounting Estimates

The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities and contingent liabilities as at the date of the consolidated financial statements, and the reported amount of revenues and expenses during the reporting period. Estimates and judgments are continuously evaluated and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the amounts recognized in the condensed consolidated interim financial statements relate to going concern assessments, share-based payments.

Management's Discussion and Analysis For the nine months ended April 30, 2021 and 2020

Financial Instruments and Risk Management

(a) Fair Value of Financial Instruments

As at April 30, 2021, the Company's financial instruments consist of cash, accounts receivable, accounts payable, note payable and loans payable. The carrying values of these financial instruments approximate their fair values because of their short-term nature and/or the existence of market related interest rates on the instruments.

IFRS requires disclosures about the inputs to fair value measurements for financial assets and liabilities recorded at fair value, including their classification within a hierarchy that prioritizes the inputs to fair value measurement. The three levels of hierarchy are:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 - Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and

Level 3 - Inputs for the asset or liability that are not based on observable market data.

Cash is measured using level 1 inputs.

(b) Financial Instruments Risk

The Company is exposed in varying degrees to a variety of financial instrument related to risks. The Board approves and monitors the risk management processes:

(i) Credit Risk

Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company is subject to credit risk on the cash balances at the bank and on amounts receivable. The investments are with Schedule 1 banks or equivalent, with the majority of its cash held in Canadian based banking institutions, authorized under the Bank Act to accept deposits, which may be eligible for deposit insurance provided by the Canadian Deposit Insurance Corporation. Accounts receivable consists of GST input tax credits receivable from the Government of Canada. Management considers that credit risks related to cash are minimal and credit risks related to accounts receivable are also minimal.

(ii) Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet the obligations associated with its financial liabilities. The Company's approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due. As at April 30, 2021, the Company had cash of $20,269 to settle current liabilities of $1,073,045.

The Company is dependent on the availability of credit from its suppliers and its ability to generate sufficient funds from equity and debt financing to meet current and future obligations. There can be no assurance that such financing will be available on terms acceptable to the Company.

Management's Discussion and Analysis For the nine months ended April 30, 2021 and 2020

(iii) Market Risk

a. Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company's loans payable bear a fixed interest rate. Management considers interest rate risk to be minimal.

b. Commodity Price Risk

Commodity price risk is the risk of financial loss resulting from movements in the price of the Company's commodity inputs and outputs. The Company's risk relates primarily to the expected output to be produced at its resource properties described in note 6 of the financial statements of which production is not expected in the near future.

During the nine months ended April 30, 2021, there were no changes to the Company's risk exposure or to the Company's policies for risk management.

Capital Management

The Company's objective when managing capital is to safeguard the Company's ability to continue as a going concern such that it can provide returns for shareholders and benefits for other stakeholders. The Company considers the items included in shareholders' equity as capital. The management of the capital structure is based on the funds available to the Company in order to support the acquisition, exploration and development of resource properties and to maintain the Company in good standing with the various regulatory authorities. In order to maintain or adjust its capital structure, the Company may issue new shares, sell assets to settle liabilities or return capital to its shareholders.

The Company is not subject to externally imposed capital requirements.

The properties in which the Company currently has an interest in are in the exploration stage, as such, the Company does not recognize revenue from its exploration properties. The Company's historical sources of capital have consisted of the sale of equity securities and interest income. In order for the Company to carry out planned exploration and development and pay for administrative costs, the Company will spend its working capital and expects to raise additional amounts externally as needed.

There were no changes in the Company's management of capital during the nine months ended April 30, 2021.

Management's Discussion and Analysis For the nine months ended April 30, 2021 and 2020

Outstanding Share Data

As at the date of this MD&A, the Company had the following issued and outstanding securities:

Description of securities	Number of securities
Issued and outstanding common shares	91,414,661
Warrants	340,000
Stock options	7,582,500
	99,337,161

Additional Disclosure

Additional disclosures pertaining to the Company, including its most recent management information circular, material change reports, press releases and other information are available on the SEDAR website at www.sedar.com or on the Company's website at www.avarone.com.