Arafura Resources (ARU) - Decision Time for Funding Strategy

Arafura Resources is a rare earths producer. The Company's principal activities consist of Nolans Project Environmental Impact Statement; mining and associated infrastructure, social and environmental feasibility evaluations, and mineral exploration, definition and development. Its segments include Project evaluation and development segment; Exploration segment, and Corporate segment.

We caught up recently with Gavin Lockyer, Managing Director at Arafura Resources, We had an opportunity to get an update on their rare earth element (REE) asset just north of Alice Springs, Australia. He filled us in on how the development plans were going there.

Arafura Resources

Arafura Resources is a Perth-based company with a world-class Neodymium-Praseodymium (NdPr) resource, the Nolans Project, in the Northern Territory of Australia. The company exists to create shareholder value by developing and marketing resources from the Nolan and other projects.

The Magic Of Rare Earth Elements     

REEs are crucial to the world’s clean energy future. In particular, NdPr are a key raw material in many green energy applications as well as in other vital products in the healthcare and aerospace sectors. One of their main uses is as NdPr magnets, which are up to 3x stronger and a tenth of the size of other magnets.

The Nolan Project

The Nolans project, wholly owned by Arafura, is located about 135km north of Alice Springs. REE are contained in several minerals occurring at the mine, including apatite, monazite and allanite. The Nolans asset contains the following JORC-202 compliant ore resources:

• Proved: 5Mt with 3.0% REE (TREO) and NdPr enrichment of 26.2%
• Probable: 24.6Mt with 2.8% REE (TREO) and NdPr enrichment of 26.5%
• Total: 29.5Mt with 2.9% REE (TREO) and NdPr enrichment of 26.4%

In addition, the project boasts these key metrics:

• 33-year mine life
• OPEX of just over US$ 27/kg NdPr produced
• EBITDA of AU$ 337M
• NPV of AU$ 782M

When fully producing, the Nolans facility could supply 10% of the global demand for NdPr. Arafura’s focus during 2021 is to procure the funds necessary to construct and operate the Nolans project in order to take full advantage of an anticipated mid-2020s supply shortfall in NdPr oxide. Arafura expects to bring on this secure, globally important resource within the next few years.

What’s It Going To Take To Move Forward?

We spoke with Lockyer about what kind of capital he needs to move the whole project forward. He said he needs about AU$1Bn. It’s not just this particular project, he says, but that what it takes to get a REE operation commercialized. He cited a similar company, Linus Corporation, which is a benchmark firm outside of China for them, to support this sum.

He indicated that his NPV is very healthy and his IRR is modest but OK. We asked him about the company’s Definitive Feasibility Study (DFS). He told us that the current one is 2 years old and shows US$50/kg. With new numbers coming shortly they will update that to US$90/kg. In his view, most analysts are looking fro a $60/kg cut off to bring new producers on stream. One of the factors that is contributing to the revised number is their very low OPEX.

He did admit that perhaps his IRR in the high $teens sacred off some investors previously. More importantly, in his view, is that many people simply think of China as a swing producer, able to switch on, then off when they wish, and that it’s hard for them to gauge an accurate commodity value. In reality, he said, in a few years, China will be using up all the REE magnet capacity it can produce, so that barrier should be going down.

Funding Sources

We then probed Lockyer about how the company intends to raise such a substantial amount of cash. He told us that they could have already done a deal with the Chinese, but that he sees a real opportunity for funding from the rest of the world, given the move toward green, clean energy in so many countries. To that end, they are speaking with potential funding sources in Australia, Europe, and Asia and convolving these discussions with the fact that they can bring a reliable and secure supply to the global market.

He made it very clear that there's a growing awareness that concerns outside of China must secure their REE supply chain for the future. Right at home in Australia, the government has a strong incentive to secure the supply. He pointed out that, for example, they have military jet contracts with the U.S and submarine purchases coming from the French, and these will need REE magnets.

How Is The Aussie Government Treating Arafura?

Lockyer indicated that the Australian government realizes that there is a definite need to address the supply-chain gap in critical minerals. Nevertheless, conversations with the Aussie government can be difficult, he said. They have, however, allocated billions of dollars into various funds that are being facilitated by Export Finance Australia and Northern Australian Infrastructure Fund. He said the Arafura is currently engaged with these two governmental entities.

Final Thoughts

The Managing Director left us with these final 3 thoughts:

• The company is sitting in a good position as far as the global macro sector is concerned.
• The commodity price, as well as the company’s stock price, is on the upswing.
• Financing conversations are ongoing – look for favourable news soon, perhaps with 6 months.

To find out more, go to Arafura Resources' Website.