Arafura Resources (ARU) - NdPr Outlook for 2022

Arafura Resources Limited is an Australian mineral exploration company focusing on rare earth elements. The company was founded in 1997 and is headquartered in Australia. Arafura Resources is listed on the Australian Stock Exchange (ASX: ARU) since 2003. The company's flagship project is the Nolans Rare Earths Project, located in Australia's Northern Territory. 

Matt Gordon caught up with Gavin Lockyer, Managing Director, Arafura Resources. Gavin served as Financial Controller for the Tethyan Copper Company Limited, before joining Arafura Resources in 2006 as a CFO and Company Secretary.

He has held several senior finance and treasury positions in global mining companies including Newcrest and Newmont. Gavin also had a successful international investment banking career with Bankwest and ANZ in Australia, Bankers Trust, and Deutsche Bank, London. His international experience has provided management and leadership across multiple disciplines including accounting, financial and investment banking, major resource development and operations, and global bank treasuries. His educational credentials include a Bachelor's degree in business, accounting, and finance. He is a member of both the Institute of Chartered Accountants and the Finance and Treasury Association of Australia. 

Company Overview

Arafura Resources Limited is engaged in the production of rare earth products. Arafura Rare Earths Pty Ltd, Arafura Iron Pty Ltd, Arafura Land Holdings Pty Ltd, and Arafura Rare Earths Processing Pty Ltd, are the company's subsidiaries. The company is focused on the development of its wholly-owned Nolans rare earths-phosphate-uranium deposit in the Northern Territory. Arafura Resources is currently developing the Nolans Neodymium-Praseodymium (NdPr) project in northern Australia. 

The NdPr Market

The Neodymium-Praseodymium market has observed a sustainable and steady growth in 2021. The previous spike in market prices was observed back in 2009-2010 based around geological activity. The current run is driven by supply and demand, instilling additional confidence in the financial markets for rare earth metals.

EV (Electric Vehicle) sales hit record numbers in 2021 despite the ongoing pandemic. China's retrofitting of electric motors to cope up with ongoing power shortages along with the jump in sales have been responsible for driving significant market demand. In fact, the current year's demand for 69,000 NdPr oxide was the forecast demand for the year 2025. 

During the previous pricing spike, China was in a position to increase internal production capacity. This time around, China is importing more material from other countries to process it within its borders and fulfill growing demands. China has ambitious electric vehicle aspirations and is looking to significantly ramp up production capabilities to meet the growing demand. 

Based on analyst forecasts, China will become a net importer of NdPr within the next 2 years. China has also started working towards a better environmental policy in an attempt to minimize the impact of unsustainable mining operations. In November 2021, the country announced the consolidation of 6 big firms into 2 larger firms, China Northern and China Southern. This decision was also made due to the shortage in material supply from Myanmar. 

Neodymium-Praseodymium is in demand due to its requirement in various sectors such as e-mobility and renewable energy. Large offshore wind turbines require a 150kg NdPr magnet in each turbine. As the EU moves towards e-mobility, renewable energy, and cleaner energy technologies, the demand for rare earth including NdPr will observe a steep rise. Additionally, the phasing out of ICE (Internal Combustion Engines) by major manufacturers on a global scale has also driven the market demand for rare earth metals. The companies are setting long-term procurement strategies for NdPr and other rare earth materials. 

The stalling of production and supply from China due to covid closures has highlighted the need for a regional supply. The ongoing semiconductor shortage also caused production halts for several industries. Although semiconductors and rare earth magnets make up 0.1% of an electric vehicle, without them, the production stops. On the other hand, the record number of EV sales throughout 2021 has put additional pressure on the supply chain. The disruption of supply from China along with the ongoing consolidating and clean-up of the industry within China has caused the ongoing price jump. 

There have been considerations in the automotive sector to substitute the rare earth metals, however, this leads to a drop in efficiency along with an impact on the battery size, car weight and as a result, the overall distance traveled on a single charge. The battery accounts for 30% of the electric vehicle's cost. Manufacturers have secured the majority of the lithium, cobalt, and graphite supply from the market. However, without the rare earth magnets and microchips, EV production isn't possible. 

Given the ongoing material shortage, there are considerations for replacing rare earth magnets in non-critical industries. For instance, an electric drill can have an iron magnet instead of a rare earth magnet. However, this would result in a much heavier drill that is no longer handheld. Given the global focus on the electrification of motor fleets, the demand for rare earth is destined to rise. 

Sourcing Rare Earth Supplies

Arafura Resources has had escalated discussions with OEMs (Original Equipment Manufacturer) over the past 3 months. The companies are struggling to come up with a battery strategy to cope up with the growing demand for rare earth metals. It is evident that the European carmakers are behind their Korean and Japanese counterparts. The companies are looking to attain a secured supply of rare earth and battery metals. 

The Korean and Japanese carmakers have an integrated supply chain while in comparison, European carmakers are more isolated. During the onset of covid, rare earth magnets were in short supply in the European market. The auto sector saw it as a supplier problem. However, once the magnet companies highlighted sourcing problems, leading to contract breaches. This situation made the automakers realize that they need to look into the supply chains and step in to find a solution. 

Arafura Resources anticipates that European OEMs will become more active and aggressive to source rare earth metals in the coming months. Recently, Stellantis, a European carmaker invested in a lithium project.

The European banking sector and government export credit agencies are also cognizant of the ongoing situation. According to Arafura Resources, the government and ECAs (Export Credit Agency) are pushing the industry in the right direction. The capital is available, however, it needs to be unlocked for the rare earth market. 

Contracts and Funding

Arafura Resources is in ongoing discussions with multiple end-users and potential customers. Out of these, at least 10 customers have advanced term sheets, including pricing. If the company executes all 10 agreements, it will be equivalent to selling 260% of its production. Hence, the company is prioritizing customers on a first-come-first-serve basis. 

During 2021, offtake discussion extended to incorporate strategic investment with a number of key parties. There is significant interest from global customers in de-risking the NdPr value chain through long term offtake and strategic investment in the upstream value chain.

The closure of Myanmar's rare earth supply outside the country has directly benefited Arafura Resources. During the initial off-take discussions, the company assessed a range of pricing mechanisms. It was evident that the company wanted price protection from the downside, while the OEMs are looking for price protection from the upside. There are also OEMs in the market that are seeking a fixed price. Currently, the discussions are ongoing and the company is looking for deals that are agreeable and mutually beneficial. 

Pricing Predictions

Arafura Resources anticipates that the NdPr pricing will cross the $100 mark. There are expectations that the NdPr will observe a price spike in early-2022, approaching a $120-$130 range. 

Targets 2021 and Beyond

Arafura Resources has an FID (Final Investment Decision) planned by Q3 2022. Prior to that, the company is looking for an off-take agreement along with an equity partner, either through a strategic component or a wider equity component. The company has received AUD$300M from the Australian government and is looking to lock in its debt structure. 

The company is also looking to enter similar deals from other countries and export credit agencies. At the same time, Arafura Resources is looking to finalize its front-end engineering and design. This will lead to a fixed price EPC (Engineering, Procurement, and Construction) contract, enabling the company to commence construction. In an ideal scenario, the company is looking to initiate groundwork in 2022 and start early on-site construction.

To find out more, go to the Arafura Resources Website