Arafura Resources (ARU) - $300M Govt Funding as Pieces Fall In Line

Arafura Resources is an ASX listed company that is focused on developing the Nolans Rare Earths mine in Central Australia. The company is committed to the sustainable supply of Rare Earths which are critical materials used in renewables and the E-mobility sector. Arafura has been advancing the project quite significantly mainly focusing on capital raisings and project funding.

The Nolans Project will encompass a mine, a process plant and related infrastructure to be constructed and located at the Nolans site, 135 kilometres north of Alice Springs in Australia’s Northern Territory. The Project is underpinned by low-risk Mineral Resources that have the potential to supply a significant proportion of the world’s NdPr demand. It is a globally significant and strategic NdPr project which, once developed, will become a major supplier of these critical minerals to the high-performance NdFeB permanent magnet market.

We caught up again with Gavin Lockyer, Managing Director at Arafura Resources. We had an opportunity to get an update about some capital funding progress for their Nolans rare earth element (REE) asset in central Australia.

Arafura Resources

Arafura Resources is an Australian company with a top-tier Neodymium-Praseodymium (NdPr) resource, the Nolans Project, in the Northern Territory of Australia. The company intends to create value for its investors by developing and marketing these critical resources from the Nolan and other projects.

Why REE’s Are Important                  

REEs are crucial to the world’s clean energy future. In particular, neodymium and praseodymium (NdPr) are critical raw materials in many carbon-mitigating energy applications as well as in other important applications in the healthcare and aerospace sectors. One of their main uses is as NdPr magnets, which are much stronger and a fraction of the size of conventional magnets. 

The Nolan Project

The Nolans project, located about 135 km north of Alice Springs, is 100% owned by Arafura. Apatite, monazite, and allanite are mined at the Nolans Project for their enriched REE content.  The Nolans asset contains the following JORC-202 compliant ore resources:

·         Proven: 5.0 M tonnes with 3.0% REE (TREO) and NdPr enrichment of 26.2%

·         Probable: 24.6 M tonnes with 2.8% REE (TREO) and NdPr enrichment of 26.5%

·         Total: 29.5 M tonnes with 2.9% REE (TREO) and NdPr enrichment of 26.4%

In addition, the project is characterized by these key business metrics:

·         33-year mine life

·         OPEX of just over US$ 27 per kg NdPr produced

·         EBITDA of AU$ 337 M

·         NPV of AU$ 782 M

Upon reaching its production capacity, the Nolans asset could supply 10 percent of the global demand for NdPr. One of Arafura’s focus areas during 2021 has been to procure the funds necessary to construct and operate the Nolans project in order to fill the gap that would be created because of an anticipated mid-2020s supply shortfall in NdPr oxide. Arafura expects to bring on this secure, globally important resource as soon as possible.

Funding Update at Arafura

Lockyer shared that Arafura is involved with obtaining two funding streams at the moment. The first is around the immediate funding requirements to supply their short-term working capital needs. The second revolves around the need for USD$1Bn to build the NdPr facility. 

Arafura successfully raised AUD $40 M lately, via private placement from institutional and other sophisticated investors. The purpose of that funding is to start the next phase of engineering, which is called front-end engineering and design (FEED). This big chunk of work will last for up to a year. Once started, they don't want to stop FEED so they needed to secure funding to see the whole process through. 

Market Reaction

Apparently, the market didn't like it, we told Lockyer. The stock dipped as low as AUD $14 afterwards. Can you comment on that, we asked? 

Yes, they did see a dip in stock price but he attributed that to a sign of the market at the time rather than Arafura’s funding activity, Lockyer told us. He believes that there has been a bit of market fatigue caused by tax-end selling before the 30th of June. 

Their intent, he continued, was to keep the momentum going, obtain the capital, keep the team together, and ensure that the project moves forward. Lockyer believes that they have justified the move to a certain extent by offering existing shareholders the opportunity to participate at the same price. They hope that goes a long way to alleviate the concerns that some of our shareholders may have had when they first saw the announcement regarding the institutional placement. 

We asked the managing director why Arafura chose the institutional placement route. He told us that attracting the amount of capital required solely in the retail market is pretty tough. The institutional interest was there. They desired to tap into some institutions that they felt would start to restructure Arafura’s share registry, aligning it for the future when they do need to raise big capital amounts for financing the project. 

How Will The Funds Be Deployed?

We then turned to the $40 M they have raised and how it would be used, especially given that they are dealing with an AUS $1 Bn project.  Lockyer told us that they have been working through the debt-funding process, in particular targeting government-backed or export-credit-agency-financed debt syndication.  

They appointed Macquarie Bank towards the end of 2020 to assist with debt advisory, and they've been working with the Australian government, with other commercial banks, and other governments globally to bring together the funding package. 

One of the topics that came up was that the lenders would prefer to see more certainty in the pricing of their construction contract. Arafura learned that they needed to do much more with their FEED program and justification. The $40 M will be deployed to take care of that business activity. Lockyer hopes to get a better result in terms of the debt structuring after that is fully addressed.

Market Dynamics

Talk to us a bit about the NdPr market, we asked.  Lockyer said that the NdPr market has remained strong in terms of its commodity pricing. It's still up well over USD$70/kg, and it has sustained these levels for quite some time now, which is quite reassuring. He also told us that customers are likely to look at long-term strategic procurement for non-battery metals, including NdPr, in the second half of 2021. They expect that the commodity price will remain strong throughout the rest of this year, Lockyer predicted. 

Arafura’s Business Agreements

Arafura has two memoranda of understanding (MOU’s) with two existing top-tier Chinese magnet producers. These two companies are actually supplying globally to the non-Chinese auto sector. These firms are concerned about losing their market share and from where they're going to source their NdPr. They require a secure source for these materials and Arafura intends to supply that, Lockyer told us. 

They are also looking to sell to European customers. These European companies may also come in with potentially government-backed financing from each particular country.  Right now, the proposed working relationship with the Europeans is being discussed as non-binding. They hope to work with them to then achieve binding agreements. Arafura is looking to start lining up off-takers and the structured debt to come together to a point where a real win-win relationship is established, Lockyer said. 

Lockyer also said that other countries such as Vietnam are looking to become players in the magnet space. Arafura is in discussions with them and others as well, he said.

Front-End Design and Logistics

Getting back to the FEED issue and the front-end design, we wondered if the proposed $40 M spend is just shaving costs off here and there, or are people expecting to see a major, say 20% or so, savings?

These are the steps involved, Lockyer relayed to us: The process involves retaining a globally known engineering group, who has an alignment with a constructor. Between them, they settle on what degree of materiality they're prepared to offer in terms of fixed price. As the process plays out, a better idea of the costs for construction will be made known. By the end of FEED, Arafura hopes to have the entire financing plan ready to go such that it can be rolled into fixed-price contracts where appropriate, he told us.

They hope then to start placing long-lead item orders so they can finalize prices for key bits of equipment. And then, as it gets closer to the date of a final investment decision (FID), they hope to lock in and start hedging a lot of the pricing. 

A Real Juggling Game

It's a real juggling game, isn’t it, we queried: You can't commit until the financing is in place but at the same time, it’s not clear when the financing is going to become clear, at least for now. 

That is correct, Lockyer responded. There are actually two things in play, he said. Firstly, the banks will always factor in a working capital premium and a cost overrun facility. Although the total construction cost is AUD$1Bn, the amount of financing actually needed will be significantly more than that to ensure that the company can address any cost overruns, whether it’s caused by inflation, scarcity of materials, or some other factor. 

Secondly, a FID will be prepared after FEED. The FID will be totally aligned with the necessary debt packaging, Lockyer told us. If they get the debt and the off-take is more or less aligned, that should cause a significant re-rating in the stock price, he continued. Then, he predicts, they can go out and raise whatever equity portion is needed at a significantly higher price and hopefully more than where they’re currently sitting. 

In the grand scheme of things, they are looking at some type of a 50-50 division of debt versus equity funding, he told us. They are probably looking at about AUD $600M in debt and $600M in equity, and that includes the cost-overrun facilities and contingencies, etc. 

Can Sufficient Capital Be Raised?

Obtaining the capital needed looks daunting, we posed. Can you calm any investor concerns about this? 

Arafura has targeted a debt-led funding structure, Lockyer told us. He knew that in a COVID world, it was going to be difficult to conduct these discussions with offshore groups. Now, however, the Australian government has announced its critical minerals strategy and he is pleased to say that Arafura now has two letters of support for a total of AUD $300M over the long term. That $300M is basically the cornerstone of their debt package, which now allows Arafura to go abroad, i.e. to the Europeans, the Southeast Asian groups, and say that the Australian government's also in this with us. 

That would enable negotiation along these lines: Your country needs this material for your manufacturing industry. There's clear evidence in the past that countries like Korea, Japan, Germany, France, and others have funded projects through government support, specifically through export credit agencies. How about you come in, sit alongside the Aussie government in this facility? Historically though, he told us, debt providers want to be the last group involved, so they'll probably want to see the ability to raise the equity and spend the equity first. 

Activities Planned for the Rest of 2021

In closing, Lockyer shared with us his plans for the remainder of 2021. It includes completion of the tendering process for FEED; solidifying commercial aspects such as off-take, debt financing, and marketing; and preparing the groundwork for an equity pitch in 2022. Some of these conversations are with ESG-motivated funders, who are becoming more interested in their sector of the market, he added. The EU, in particular, is bringing in legislation around the provenance of supply, and making sure that there are anti-slavery provisions being factored into your supply chains, etc., and we can offer that, he said.

He closed out our conversation with this simple summary: “Our focus is the Nolan's NdPr project”. 

To find out more, go to the Arafura Resources Website