SUNSTONE METALS LTD — Interim / Quarterly Report 2011

Mar 13, 2011

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Avalon Minerals Ltd ABN 68 123 184 412 Half-year Financial Report 31 December 2010

Ha l f-year Financi a l Report – 31 D ecember 201 0

Avalon Minerals Ltd

Contents	Page
Directors' report	3
Auditor’s Independence Declaration	5
Consolidated Statement of Comprehensive Income	6
Consolidated Statement of Financial Position	7
Consolidated Statement of Cash Flows	8
Consolidated Statement of Changes in Equity	9
Notes to the Consolidated Financial Statements	10
Directors’ Declaration	14
Auditor’s Independent Review Report to Members	15

Half-year Financial Report – 31 December 2010

2

AVALON MINERALS LTD

Directors’ report

Your directors present their half-year report on the consolidated entity (“Group”) consisting of Avalon Minerals Ltd (“Avalon” or “Company”) and the entities it controlled at the end of, or during, the half-year ended 31 December 2010.

Directors

The following persons were directors of Avalon Minerals Ltd during the half-year and up to the date of this report:

Mr D L McSweeney

Mr A T Munckton - Appointed as Managing Director on 18 August 2010 (previously General Manager) Tan Sri Abu Sahid Bin Mohamed

Mr S Stone

Mr A Al Khadra - Appointed on 1 March 2011

Mr G C Steinepreis - Resigned on 1 March 2011

Mr A Kamaruddin - Alternate for Tan Sri Abu Sahid Bin Mohamed

Review of operations

A summary of consolidated revenues and results is set out below:

Review of operations A summary of consolidated revenues and results is set out below:
	Results 31 December 2010 $
Revenue from continuing operations Net loss before income tax expense Income tax expense Net loss attributable to members of Avalon Minerals Ltd	55,888
	(807,818) -
	(807,818)

Financial Position

At the end of the half-year the consolidated entity had a cash balance of $1,742,426 and net assets of $12,000,832.

Total liabilities amounted to $1,791,893 and were limited to trade and other creditors and employee entitlements.

Corporate

During the half-year the Company completed a share placement of 20,000,000 fully paid ordinary shares at 16 cents per share to raise $3,200,000.

Subsequent to half-year end the Company completed a share placement of 22,841,542 fully paid ordinary shares at 18 cents per share raising $4,111,478. The Company also completed a one-for-five non-renounceable Entitlements Issue in which it issued 34,119,508 fully paid ordinary shares at 18 cents per share to raise a gross amount of $6,141,511. Expenses associated with the Entitlements Issue were $343,426 including a $315,213 underwriting fee.

Exploration

Viscaria Copper-Iron Project

The Viscaria Copper-Iron Project in northern Sweden is the company’s primary focus and forms the basis for Avalon’s plans to become a mid-tier copper and iron ore producer.

Half-year Financial Report – 31 December 2010

3

AVALON MINERALS LTD

Directors’ report

Review of operations (continued)

T h e Viscaria d eposits co n sist of bot h Volcanog e nic Massive Sulphides (VMS) an d Iron Oxi d e–Copper– G old (I O CG) styles of minerali s ation. The p roject feas i bility studi e s show pro d uction of m edium gra d e (25%) co p per co n centrates a n d high grad e (69.5%) ir o n ore conc e ntrates idea l for the Eur o pean base m etals and ir o n ore mark e ts.

A f ter completion of the Pr e -Feasibility Study (PFS ) in 2010, Avalon com m enced RC a n d diamond drilling of t h e D Z o ne resource to upgrade it to Measu r ed and Indicated Reso u rce status. B y Decemb er 2010 approximately 2 , 000 m e tres of a 10,000 metre p r ogram had b een compl e ted.

In parallel wit h the drillin g program a w ork sched u le of engin e ering, desig n , test-work and cost es t imation is b e ing co m pleted ove r 2011 to es t imate the ca p ital and op e rating cost o f the project developm en t and oper a tions to ±10%. T h e Definitive Feasibility S tudy (DFS) of the proje c t is due for completion i n the Septe m ber quarte r , 2011.

In addition to the curren t feasibility study work , Avalon is conducting exploration programs o ver its exi s ting te n ement hold i ngs in the d istrict searching for ad d itional iron ore and ba s e metal mi n eralisation. The explor a tion te n ure is divi d ed into fi v e project a reas, three of which a re predom i nantly cop p er and tw o of which are pr e dominantly iron ore.

A v alon aims t o commence production f rom Viscar i a in 2013 fr o m open cut resources fr o m the A, B and D Zones.

Adak Copper-Zinc Project

T h e Adak Cop p er-Zinc Pr o ject lies 30 0 km south o f Viscaria in the Skelleft a n VMS dist r ict in north e rn Sweden. The Pr o ject contai n s four hist o rical mines – Adak, Li n dskold, Br a nnmyran and Rudtjeba c ken which c over an area of 26.7km².

A v alon has co m pleted the historical d a ta validatio n of the proj e ct and has d eveloped e x ploration p r ograms ove r the te n ure to asse s s the nearer surface mi n eralisation. T he progra m s are proposed to com m ence in the third quart e r of 2011 in line w i th the avail a bility of dri l l rigs follo w ing Viscari a programs.

A d ak is attrac t ive as an e x ploration p roject due t o the poten t ial surroun d ing the exi s ting mines and its strategic lo c ation withi n transport d i stance of ex i sting treat m ent facilitie s .

Auditors’ Independence Declaration A copy of the A uditors’ I n dependence Declaration as required under secti o n 307C of t h e Corpora t ions Act 20 0 1 is se t out on pag e 5.

T h is report is m ade in acc o rdance with a resolution of the direc t ors.

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D a vid McSwe e ney C h airman Pe r th, Wester n Australia

14 March 201 1

H alf-year Finan c ial Report – 3 1 December 2010

4

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Auditor’s Independence Declaration to the Directors of Avalon Minerals Ltd

In relation to our review of the financial report of Avalon Minerals Ltd for the half-year ended 31 December 2010, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

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Ernst & Young

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R J Curtin Partner Perth 14 March 2011

Liability limited by a scheme approved under Professional Standards Legislation

RC:VP:AVALON:022

AVALON MINERALS LTD

Consolidated Statement of Comprehensive Income

for the half-year ended 31 December 2010

Note	Consolidated Half-year ended 31-Dec-2010 $ Half-year ended 31-Dec-2009 $
Revenue from continuing operations Other income 6 Employee benefits expense 7 (a) Corporate and office expenses 7 (b) Depreciation expense Exploration expenditure written off 7 (c) Other expenses Loss from continuing operations before income tax Income tax expense Net loss for the period Other comprehensive loss Foreign currency translation Total comprehensive loss for the period Net loss for the period is attributable to: Members of Avalon Minerals Limited Total comprehensive loss for the period attributable to: Members of Avalon Minerals Limited Earnings per share (cents per share): Basic earnings per share Diluted earnings per shares 4 4	55,888 5,695 26,884 - (478,217) (177,674) (350,420) (432,595) (40,764) (30,192) - (14,007) - (1,301)
	(807,818) (628,885) - -
	(807,818) (628,885) (312,029) (112,441)
	(1,119,847) (741,326)
	(807,818) (628,885)
	(807,818) (628,885)
	(1,119,847) (741,326)
	(1,119,847) (741,326)
	(0.55) (0.55) (0.67) (0.67)

The Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes.

Half-year Financial Report – 31 December 2010

6

AVALON MINERALS LTD

Consolidated Statement of Financial Position

as at 31 December 2010

Note	Consolidated At 31-Dec-10 $ At 30-Jun-10 $
ASSETS Current assets Cash and cash equivalents Trade and other receivables Total Current Assets Non-Current Assets Plant and equipment Exploration and evaluation Total Non-Current Assets TOTAL ASSETS LIABILITIES Current Liabilities Trade and other payables Total Current Liabilities Non-Current Liabilities Provisions Total Non-Current Liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity 8 Reserves Accumulated losses TOTAL EQUITY	1,742,426 2,927,242 414,841 227,335
	2,157,267 3,154,577
	251,037 144,409 11,384,421 7,846,158
	11,635,458 7,990,567
	13,792,725 11,145,144
	1,783,767 1,053,981
	1,783,767 1,053,981
	8,126 5,631
	8,126 5,631
	1,791,893 1,059,612
	12,000,832 10,085,532
	20,276,065 17,300,788 (628,795) (376,636) (7,646,438) (6,838,620)
	12,000,832 **10,085,532 **

The Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes.

Half-year Financial Report – 31 December 2010

7

AVALON MINERALS LTD

Consolidated Statement of Cash Flows

for the half–year ended 31 December 2010

	Consolidated Half-year ended 31-Dec-10 $ Half-year ended 31-Dec-09 $
Cash flows from operating activities Payments to suppliers and employees (inclusive of goods and services tax) Interest paid Interest income Other income Net cash outflow used in operating activities Cash flows from investing activities Purchase of plant and equipment Exploration and evaluation expenditure Net cash outflow used in investing activities Cash flows from financing activities Proceeds from issues of shares Costs associated with issue of shares Net cash inflow from financing activities Net increase/(decrease) in cash and cash equivalents held Cash and cash equivalents at the beginning of the half- year Cash and cash equivalents at the end of the period	(713,992) (1,066,674) - (4) 55,888 26,884 5,695 -
	(652,409) (1,039,794)
	(148,984) (21,085) (3,374,092) (1,656,724)
	(3,523,076) (1,677,809)
	3,200,000 4,465,540 (209,331) (49,432)
	2,990,669 4,416,108
	(1,184,816) 1,698,505 2,927,242 1,919,002
	1,742,426 3,617,507

The Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes.

Half-year Financial Report – 31 December 2010

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AVALON MINERALS LTD

Consolidated Statement of Changes in Equity

for the half-year ended 31 December 2010

For the half-year ended 31 December 2010	Issued Capital $ Share-Based Payments Reserve $ Foreign Currency Translation Reserve $ Accumulated Losses $ Total $
As at 1 July 2010 Loss for the financial period Other comprehensive income Total comprehensive loss for the period Equity Transactions Shares issued Share issue costs Share based payments As at 31 December 2010 For the half-year ended 31 December 2009	17,300,788 234,471 (611,107) (6,838,620) 10,085,532 - - - (807,818) (807,818) - - (312,029) - (312,029)
	- - (312,029) (807,818) (1,119,847) 3,200,000 - - - 3,200,000 (224,723) - - - (224,723) - 59,870 - - 59,870
	20,276,065 294,341 (923,136) (7,646,438) 12,000,832
	Issued Capital $ Share-Based Payments Reserve $ Foreign Currency Translation Reserve $ Accumulated Losses $ Total $
As at 1 July 2009 Loss for the financial period Other comprehensive income Total comprehensive loss for the period Equity Transactions Shares issued Share issue costs Share based payments As at 31 December 2009	9,735,426 205,505 (277,207) (5,576,605) 4,087,119 - - - (628,885) (628,885) - - (112,441) - (112,441)
	- - (112,441) (628,885) (741,326) 4,465,540 - - - 4,465,540 (241,726) - - - (241,726) - - - - -
	13,959,240 205,505 (389,648) (6,205,490) 7,569,607

The Consolidated Statement in Changes in Equity should be read in conjunction with the accompanying notes.

Half-year Financial Report – 31 December 2010

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AVALON MINERALS LTD

Notes to the Consolidated Financial Statements

Note 1. Basis of preparation and changes in accounting policies

• (a) Basis of preparation

This general purpose condensed financial report for the half-year reporting period ended 31 December 2010 has been prepared in accordance with AASB 134 Interim Financial Reporting and the Corporations Act 2001.

The half-year financial report does not include all of the notes of the type normally included in an annual financial report and therefore cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the consolidated entity as the full financial report. Accordingly, this report is to be read in conjunction with the annual report for the year ended 30 June 2010 and any public announcements made by Avalon Minerals Limited during the halfyear reporting period in accordance with the continuous disclosure requirements of the ASX Listing Rules.

Apart from the changes in accounting policy noted below, the accounting policies and methods of computation are the same as those adopted in the most recent annual financial report.

• (b) New and amended Accounting Standards and Interpretations

Since 1 July 2010, the Group has adopted all the Standards and Interpretations mandatory for annual periods beginning on or after 1 July 2010. Adoption of these Standards and Interpretations did not have any effect on the financial position or performance of the Group.

The Group has not elected to early adopt any new standards or amendments that are not mandatorily effective.

Note 2. Contingencies

As at 31 December 2010 the Company has no contingent liabilities.

Note 3. Dividends

There were no dividends declared or paid during the half-year.

Half-year Financial Report – 31 December 2010

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AVALON MINERALS LTD

Notes to the Consolidated Financial Statements

Note 4. Earnings per share

Basic earnings per share amounts are calculated by dividing net profit for the period attributable to members of the Company, by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing net profit attributable to ordinary equity holders of the Company, by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all dilutive potential ordinary shares.

Basic and diluted earnings per share calculations are as follows:

Net loss for the period attributable to members of Avalon Minerals Limited Weighted average number of ordinary shares for basic earnings per share Adjustment factors Entitlements Issue announced on 10 January 2011 Entitlements Issue announced on 3 December 2009 Earnings per share (cents per share) - basic for loss for the period attributable to ordinary equity holders of Avalon Minerals Limited - diluted for loss for the period attributable to ordinary equity holders of Avalon Minerals Limited	Consolidated Half-year ended 31-Dec-2010 $ Half-year ended 31-Dec-2009 $ (807,818) (628,885)
	Shares Shares 142,603,039 95,374,768
	Adjustment Factor Adjustment Factor 1.037 1.037 - 1.011
	Cents Cents (0.55) (0.67) (0.55) (0.67)

Current period and prior period earnings per share have been restated with an adjustment factor of 1.037 as a result of the equity issue announced in January 2011, which included a fully underwritten one for five non-renounceable Entitlements Issue at 18 cents per share to existing shareholders.

Prior period earnings per share have also been restated with an adjustment factor of 1.011 as a result of the equity issue announced on 3 December 2009, which included a one for seven non-renounceable Entitlements Issue at 21 cents per share to existing shareholders.

Half-year Financial Report – 31 December 2010

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AVALON MINERALS LTD

Notes to the Consolidated Financial Statements

Note 5. Events occurring after balance sheet date

On 10 January 2011 the Company issued 22,841,542 fully paid ordinary shares at 18 cents per share pursuant to a placement to a new cornerstone investor, raising a total of $4,111,478.

On 21 and 22 February 2011 the Company issued 34,119,508 fully paid ordinary shares at 18 cents per share pursuant to a 1 for 5 non-renounceable Entitlements Issue to existing eligible shareholders, raising a total of $6,141,511 before expenses.

Other than those shown above, no matters or circumstances have arisen since the end of the half-year which have significantly affected, or may affect the operations of the entity, the results of those operations, or the state of affairs of the entity in financial years subsequent to the half-year ended 31 December 2010.

Note 6. Revenue

	Consolidated	Consolidated
	Half-year	Half-year
	ended	ended
	31-Dec-2010	31-Dec-2009
	$	$
Revenue
Interest income	55,888	26,884

Note 7. Expenses

(a) Employee benefits expense Wages and salaries Less transfer to exploration and evaluation Superannuation expense Non-executive director’s fees Staff training and recruitment Share based payment expense Other employee benefits expenses	Consolidated Half-year ended 31-Dec-2010 $ Half-year ended 31-Dec-2009 $ (608,049) (196,380) 419,922 112,150 (54,708) (17,201) (60,000) (52,500) (63,290) (8,925) (59,870) - (52,222) (14,818)
	(478,217) (177,674)

Half-year Financial Report – 31 December 2010

12

AVALON MINERALS LTD

Notes to the Consolidated Financial Statements

Note 7. Expenses (continued)

(b) Corporate and office expenses Corporate administration expenses Office expenses (c) Exploration expenditure written off Exploration expense(i)	Consolidated Half-year ended 31-Dec-2010 $ Half-year ended 31-Dec-2009 $ (247,791) (357,957) (102,629) (74,638)
	(350,420) (432,595)
	- (14,007)

(i)Exploration expenditure written off relates to tenements held by the Company’s wholly owned subsidiaries Xmin Pty Ltd and Resource Properties Pty Ltd. All tenements held by these companies have now been relinquished.

Note 8. Equity securities issued

On 22 September 2010 the Company issued 20,000,000 fully paid ordinary shares at 16 cents per share pursuant to a placement to sophisticated investors, raising a total of $3,200,000 before expenses.

Note 9. Segment reporting

The Group currently operates in one business segment and one geographical segment, namely copper and iron ore exploration in Sweden. The revenues and results of this segment are those of the Group as a whole and are set out in the Consolidated Statement of Comprehensive Income .

The Group continues to review and assess other resource projects both within Australia and overseas as opportunities arise.

Half-year Financial Report – 31 December 2010

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AVALON MINERALS LTD

Directors’ Declaration

In a c cordance w i th a resoluti o n of the Di r ectors of A v alon Miner a ls Ltd, I sta t e that:

In t h e opinion o f the director s :

• (a) the financial stateme n ts and the n otes of the Consolidat e d Entity ar e in accord a nce with th e Corporati o ns Act 200 1 , including:

• (i) givin g a true an d fair view of the Consolidated E ntity’s fin a ncial posit i on as at 31 Dece m ber 2010 a n d of its per f ormance for the half year then ende d ; and

• (ii) comp l ying with Accounting Standard AASB 134 Interim F inancial R e porting an d Corp o rations Reg u lations 2001 ; and

• (b) there are r e asonable g r ounds to be l ieve that th e Consolidated Entity w i ll be able to pay its deb t s as and wh e n they become due and p ayable.

This declaration is signed in a ccordance w ith a resol u tion of the B oard of Dir e ctors.

On b ehalf of the board

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Dav i d McSween e y Cha i rman Pert h , Western A ustralia

14 M arch 2011

Hal f -year Financia l Report – 31 D ecember 2010

14

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To the members of Avalon Minerals Ltd

Report on the half-year Financial Report

We have reviewed the accompanying half-year financial report of Avalon Minerals Ltd, which comprises the statement of financial position as at 31 December 2010, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the half year ended on that date, other selected explanatory notes and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at 31 December 2010 or from time to time during the half year.

Directors’ Responsibility for the half-year Financial Report

The directors of the company are responsible for the preparation and fair presentation of the half-year financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001 . This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the half-year financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibility

Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of Interim and Other Financial Reports Performed by the Independent Auditor of the Entity , in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the consolidated entity’s financial position as at 31 December 2010 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001 . As the auditor of Avalon Minerals Ltd and the entities it controlled during the half-year, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.

A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Independence

In conducting our review, we have complied with the independence requirements of the Corporations Act 2001 . We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the Directors’ Report.

Liability limited by a scheme approved under Professional Standards Legislation

RC:VP:AVALON:023

Conclusion

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of Avalon Minerals Ltd is not in accordance with the Corporations Act 2001 , including:

• i) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2010 and of its performance for the half-year ended on that date; and

• ii) complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001 .

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Ernst & Young

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R J Curtin Partner Perth 14 March 2011

RC:VP:AVALON:023