Keith Goode's Report - Avoca Resources

Since our last report dated July 2006, Avoca Resources Limited (AVO) completed a bankable feasibility study on its Trident discovery near Higginsville in WA. AVO has re-opened and dewatered the decline and old workings of Poseidon South, and developed the decline and exposed ore on two levels (at their expected positions). AVO also bought Chalice and its tenement package, thus filling in many of the gaps that AVO had in its tenement holdings. The acquisition of Chalice and its tenements from Chalice Gold Mines (CHN) cost A$5m in 3.5m shares @ A$1.43, a further A$0.8m at a 5-day VWAP price (after certain conditions, if at $1.43, then it is ~0.56m shares), and 2m 3-year options at a strike price of A$1.79.

During the past year, AVO raised A$125m in April 2007 through the placement of 53m shares @ A$1.32 raising A$70m, a A$40m convertible 6%pa bond @ A$1.75 (to 14 May 2012, equivalent to 22.86m shares if converted), A$10m in project debt and ~A$5m as an SPP (was 6.2m shares @ A$1.32 per share, or $8.2m), resulting with the exercise of some options in the current 213.5m ordinary shares in issue. There are also 11.4m options which are in-the-money, mostly at exercise prices up to A$0.90 by 31 July 2011, the ~0.56m Chalice shares, and a further 6.0m options out-of-the-money at exercise prices up to A$1.80.

We (ERA) visited AVO's Trident operation at Higginsville and expected exploration targets at Chalice in July 2007, and reviewed AVO's other Australian exploration programmes, together with available public information as part of the preparation to produce this report. We also drew from our historical site visit notes and presentations made on Chalice during the period from its start in 1995 to closure in 1999.

Other Prospects

This report focuses on AVO's current operations at Higginsville and already delineated potential at Chalice. However, having divested its SA IOCG exploration interests into the Rex Minerals IPO (scheduled to list in August 2007) for 6m Rex shares (@ 25c) and 1m 4-year options with a 30c strike price, and now contributing to its Encounter Resources uranium exploration joint venture, AVO just has Mt Fisher outside of the Higginsville/Chalice region. Mt Fisher is the third greenstone belt in northern WA from Wiluna in the west, to Bronzewing in the middle to Fisher in the east. A classic large target area, about $7m has historically been spent by CRA in the mid-90s followed by $3m by Delta Gold in the "central" area.

New Wills Discovery

AVO's tenement package in the Higginsville/Chalice Region following the Chalice acquisition is shown in Figure 1a, with the new Wills Prospect discovery announced on 20 July 2007 in Figure 1b. Wills represents shallow supergene mineralisation over approximately 1km on strike by 200m wide as shown in Figure 1c, that could be treated at AVO's new Higginsville plant. The Prospect lies at the junction of the lesser known Black Knob fault and a major east-west dyke at the top of the Widgie Dome where coincidentally Consmins' Munda Gold Project also lies. The mineralisation strikes mainly ENE forming a classic lambda signature structure with some other mineralisation following a NNW/SSE axis. It is as yet too early to assess whether there is orebody potential beneath the supergene zone.

The Black Knob fault has been barely tested along its length by historic prospecting or other company drilling, possibly because it generally lies under ~20m of cover, and northwards from the Wills Prospect, lies under Lake Lefroy. The SSE projection of the Black Knob fault meets the northern projection of Trident in AVO's Madrid and Barcelona Prospect target areas, which are at an early stage of exploration.

Higginsville (AVO : 100%)

AVO's Higginsville operation is located about 150km south of Kalgoorlie and 55km north of Norseman in WA as shown in Figure 1a. The acquisition of Chalice's Higginsville tenements has significantly simplified AVO's holdings as shown in Figure 2a, filling in a number of the gaps in AVO's tenement package, and providing it with control of almost the complete line of NNE striking orebodies shown in Figures 2b and 2c.

Geology

AVO has made significant advances in delineating the mineralisation between the old Poseidon South open-cut and Trident since our (ERA) last report dated July 2006, resulting in the reserves and resources for Trident as at December 2006 (currently being updated) shown in Table 1.

In some ways as shown in Figure 3a, there is simply too much mineralisation at Trident and it is a pity that it is not ~150m higher and open-pittable. While the main mineralisation was grouped into the 3 zones of Athena, Western and Eastern as shown in Figure 3b, there is now the Apollo extension, and infill drilling has established a continuous link between the main vein sets at Poseidon and the lodes at Trident.

The steeply dipping E6 eastern vein of Poseidon South can be seen to directly link to the Athena lodes of Trident as shown in Figure 3c, with infilling of the gap between (drillholes named TUG) steadily in progress as shown in Figure 4a, having extended the main Athena 30 lode by >200m South. The Athena 30 lode has also been extended compared to its reported ore resource outline shown in Figure 4b. With the Western zone extended by 200m further north due to the HIGD117 intersection in Figure 4a, and the latest resource envelope for Apollo in Figure 4c, there should be a significant increase in resources.

Although the Trident lodes link with the Poseidon veins, a subtle difference occurs at Trident that literally multiplies the grades, and that is the presence of pyrrhotite and arsenopyrite (non-refractory, more crystalline) in the orebody. It is often remarked of Trident that pyrrhotite + arsenopyrite + quartz = grade, and ~80% of the drill holes contains at least one speck of visible gold. It should also be noted that the grades have been top-cut, which can dramatically understate the underlying resources that may be mined (being Athena : 100g/t, Eastern : 20 - 65g/t, Western : 15g/t, and Poseidon : 60 g/t).

Mining

The conditions in the old Poseidon South underground stopes and workings are excellent as shown in Figure 5a, where the steeper west dipping Poseidon East veins (E6) appear to have been essentially laminated quartz, which is similar to the recent Athena intersection shown inset in Figure 5a. Visible gold reputedly often occurred, as also seen in the recent drilling of the flatter Poseidon East veins shown in Figure 5b. It is these flatter up to ~30º east dipping veins that could link to the recent development of Trident's Eastern Lodes on the 1155 level (equivalent to Level 2 at the Poseidon South underground) at the time of our (ERA) visit in July 2007 as shown in Figure 5c, on the other side of a small fault.

Also at the time of our visit, the top of the steeper Trident Eastern lodes were intersected on 1170 Level as shown in Figure 6a. We examined a number of the drillholes including the Apollo mineralisation shown in Figure 6b, showing an abundance of quartz over a large interval, plus sulphides & the odd speck of vg.

Due to the extensive mineralisation, one of the difficulties is expected to be deciding where the stope limits are. It is currently expected to use a combination of air-leg and jumbo stoping for the narrow veins/lodes, slos (sub-level open-stoping) for the Western Zone and bench stoping for the other situations. We have assumed that paste fill is going to be used, especially for Athena located in ultramafics (stronger than east Kambalda).

With the additional jumbos now on-site, and good breaking ground conditions, development is expected to pick up to >600m per month, establishing the initial bench stopes on the Eastern lodes and then the slos stopes in the Western zone. The southern ventilation shaft has been completed and the northern one is in progress (they were designed at each end of the then perceived Trident orebody). Depending on when the ore commences satisfactory treatment, stoping is expected to increase over development.

Treatment  

With the blow-out in toll treatment charges to >A$30/t at available plants in addition to trucking costs and potential sampling disputes, it could be very detrimental to treat the ore through a competitor's plant, and better to wait until AVO's own plant is completed in mid-2008. Rated at 1mtpa (hard) it could treat at 1.2mtpa to 1.3mtpa, with numerous surface stockpiles, other sources such as Fairplay and the new Wills discovery, plus the potential at Chalice. For our modelling we have conservatively assumed that AVO does not treat any ore through another plant, accepting that it may sell some for cashflow purposes.

Chalice (AVO : 100%)

Background History

Chalice is located about 22km (~32km by road) southwest of Higginsville as shown in Figure 7a, and was found in September 1993 on strike north of some old prospectors' workings following up an older 1987 geochem survey by Billiton that was infilled by the Widgiemooltha JV (70% held by Samantha Gold, which was later taken over by Resolute [RSG]). Production started in August 1995 from a 750,000tpa plant that had a production rate of 1.0mtpa to 1.3mtpa before the plant closed in May 1999, after producing almost 4.0mt @ 4.6/t for ~590,000oz as shown in Figure 7b, mainly from one lode as shown in Figure 7c.

It was essentially an open-cut with an in-wall ramp at the end of its life and some underground workings (~218,000t @ 5.0g/t) in which the mineralisation was complicated by pegmatite intrusions. We (ERA) visited the original mine between 1996 & 1998, including the underground. Resolute JV'd most of its Higginsville tenements to WMC in 1999 (taken over by Gold Fields, who then sold the package to Avoca in 2004), and Chalice and its other Higginsville tenements to Bullion in 2003. Bullion then sold them to its subsidiary Chalice Gold Mines (CHN) for CHN shares in 2005. CHN conducted a scoping study which concluded that reopening the mine would be uneconomic for them, and hence sold it to Avoca for ~A$6m

Current State

The Chalice pit is flooded to about 80m below surface (it had 20m high benches) as shown in Figure 8a, or about 100m deep to the pit floor. The water level coincides with the mined level achieved in July 1996 as shown in Figure 8b, by a distinctive pattern in the pegmatites on the eastern wall. This pattern shows that the water level is about one bench (~20m) above the start of the in-wall ramp, as shown in Figure 8c. The inferred depth of the water is also shown in Figure 9a, along with the gold distribution at that time.

Geology, Mining and Treatment

The Chalice deposit is contained within an alternating sequence of mafic and ultramafic rocks, metamorphosed up to amphibolites that lie between a massive granitoid complex called the Boorabbin Batholith to the west (also known as the "Western Granite"), and the Pioneer Dome to the east as shown in Figure 7a. Chalice has been interpreted as being hosted within a west dipping thrust fault, reactivated by younger thrusts associated with the deformation of the Pioneer Dome.

The overlying Western Granite is clearly shown in Figure 9b of the plan of the pit as at July 1996, with the bulk of the mineralisation associated with a strongly foliated hornblende-feldspar amphibolite as shown in Figure 9c (with some of the very high grade intersections inset). The distribution of the gold mineralisation underwent many interpretations, starting from the initial gm-m plot shown in Figure 10a, through the faulted version in Figure 9a, to two or three parallel lodes at depth, before settling into a series of pods in parallel shoots plunging northwards (the same as Higginsville).

Resolute (RSG) started a cut-back above the north wall, before changing to an in-wall ramp and declining into the orebody. There were plans to continue declining down through the orebody pods, but they stopped. We (ERA) examined the core and intersections of drillhole WMD 187 (back-coloured green in Figure 10b), which has a value of 38m @ 6.81g/t, but which shows two discrete zones over a 23m @ 9.4g/t interval (400m to 423m downhole) of 9m @ 9.9g/t (from 400m) and 7m @ 16.2g/t (separated by 7m @ 2.1g/t), (outside this zone they are mostly <1g/t, [Chalice low grade intersections were often <0.1g/t]).

This infers that RSG may have been thinking of the underground as a massive bulk mining stoping exercise, whereas instead it could be more amenable to two high grade lodes, or a narrower sub-level open-stoping method. CHN's scoping study failed because it needed to dewater the open-cut and pay to truck and toll-treat its ore. Toll treating charges from available plants have soared to unfriendly levels of >A$30/t following the acquisition and AIM listing of Norseman and Paddington. However, AVO can pump the water to its Fairplay pit and use the Chalice borefield with its higher quality water for its mid-'08 plant.

Upside Potential

Aside from the historic target areas of Vendetta, Franks Find and Cavalier (with the surface above Cavalier apparently displaying very similar intersections and characteristics to the surface above Trident), CHN conducted a 3d-IP survey that delineated some classic high resistivity targets but did not follow them up. Interestingly, the double-digit grade intersections in WMD 187 are associated with foliation and distortion of the rocks as shown in Figure 10c, and with pyrrhotite (the same as Trident). From our "old" notes, a correlation was noted between pyrrhotite and higher gold values throughout Chalice.

It can be seen in Figure 11a, that the IP anomalies do correlate to mineralisation in the Chalice Pit. The aeromag of Figure 11b, shows that the Chalice pit lies in an area of low sensitivity, with its lodes striking mainly north-south, and there appear to be other similar untested settings to Chalice. Combining the higher IP resistivity positions in Figure 11c, shows a correlation between them and the potential Chalice duplicates. Other sections show that outside of Chalice, very little drilling penetrated below 100m from surface, which is where the cores of the anomalies are located. Since no graphitic shale has been observed in the area, logically the anomalies may be reflecting from sulphide orebodies, and hence form obvious drill targets. Walking through the area we also encountered apparently untested gabbros too.

Financial Considerations

For our modelling analysis shown in Table 3, we have used a base gold price of US$700/oz and applied sensitivities of +/- US$50/oz in the sensitivity table. We have ignored treatment until July 2008, though accept that there may be an ore sale for cashflow purposes. AVO appears to have raised sufficient finance to start production in mid-2008. It should be recognised that this production scenario is an ERA scenario, and is just one of a number of possible scenarios that could occur.

Management

Board of Directors

Robert Reynolds - Non-Executive Chairman since 2002. Rob is a Chartered Accountant with over 35 years' experience in commerce and practice. Rob jointly oversaw the growth of Delta Gold from a junior explorer in 1983 through to a mid-size gold mining company in 2001 in which his roles were in corporate planning, capital raising, corporate governance and supervision of administration and finance.

Rohan Williams - Managing Director since 2001. Rohan is a Geologist with over 19 years' experience and was previously Chief Geologist at WMC's St Ives and Central Norseman Gold Operations. Rohan has experienced world class nickel, copper and pge occurrences throughout the world, and has had exploration discovery successes at St Ives Gold, CNG Gold and Kambalda Nickel.

David Quinlivan - Non-Executive Director since 2005. David is a Mining Engineer with over 30 years' experience predominantly in WA, having worked at all levels from feasibility study through to production. David has had an extensive career with a number of companies such as at Newcrest, Normandy and WMC and has worked on many projects, the latest being manager for the Perseverance Deeps development at Leinster.

Stephanie Unwin - Non-Executive Director since 2001. Stephanie is a Corporate Lawyer in WA, having started with ASIC followed by working for a major national law firm. Stephanie has had extensive experience providing corporate advisory services predominantly to resource companies including mergers and acquisitions, fundraising, IPOs and ASX & ASIC compliance matters.

Jan Castro - Non-Executive Director since 2007. Jan is the MD of Pala Investments which attained a 13.3% holding in AVO in early 2007. Prior to Pala, Jan was Senior VP Investments & Corporate Affairs for a major NYSE listed Russian mining and metals company.

Kevin Hart - Company Secretary.

Senior Management and Technical Team

Tony James - GM Mining since 2006. Tony is a Mining Engineer with over 20 years' mainly underground experience in gold and nickel in WA. Tony was Mining Manager underground at Kanowna Belle for 3 years until 2002, when he became GM Underground of Black Swan until 2005

Chris Newman - Geology Manager - Higginsville since 2004. Chris is a geologist with over 20 years' experience mainly in WA. Chris was Senior Mine Geologist at the Victory Gold Complex and Junction at St Ives. Chris is credited with having recognised and discovered Trident.

Grant Dyker - CFO since 2007. Grant is a Chartered Accountant with over 17 years' experience having held a number of senior finance positions in listed mining and manufacturing companies. Prior to Avoca, Grant was CFO at Aztec Resources (Koolan Island Project), establishing project finance & cost controls.

AVO also draws on its experienced management team, and consultants as and when required.

Chart of Avoca Resources over the past year (July 2006 to July 2007) (Source : www.yahoo.com)