Securing the Supply Chain: Arafura Resources and the Nolans NdPr Project

• Arafura Resources is developing the Nolan's project in the Northern Territory, focusing on neodymium and praseodymium (NdPr). It has the potential to produce approximately 4,500 tons annually, equivalent to 6% of global production.
• NdPr is vital for the creation of permanent rare earth magnets, crucial for the electrification of transport, wind turbines, and other modern technologies.
• The Nolan's project was discovered in the early 2000s. The initial flow sheets for the project were not economically viable during the rare earth price spike around 2011-2012, prompting a redesign.
• Arafura's process involves a unique phosphoric acid pre-leach process. This study essentially costs out the actual build of the project.
• The company is currently in the front-end engineering and design phase, having raised $45 million the previous year. They have secured a commitment of $300 million from the Northern Australia Infrastructure Facility (NAIF) and are exploring further financing options for the project.

Rare Earth Elements (REEs) like neodymium and praseodymium are essential components of permanent magnets, which are vital for electric vehicles, wind turbines, and many advanced technologies. However, the REE supply chain has been dominated by China for decades, causing concerns about supply security. Arafura Resources, an Australian exploration and development company, aims to become a major global supplier of neodymium and praseodymium oxides with its 100%-owned Nolans NdPr project in Australia's Northern Territory. I spoke with Stuart Watkins, Arafura Resources General Manager of the Nolans Project, to understand the project's potential and Arafura's path to production. Based on the company's innovative processing method, high-grade resource, and advanced project development, Arafura Resources represents an exciting investment opportunity to secure the REE supply chain.

Overview of Nolans Rare Earth Project

The Nolans rare earth project, located 135km north of Alice Springs in Australia's Northern Territory, contains a large resource of rare earth elements. The project is focused on producing neodymium and praseodymium (NdPr), which constitute nearly 4% of the total rare earth oxides. Arafura aims to produce around 4,500 tonnes of NdPr oxide per year, which would meet approximately 6% of global demand. This would make Nolans one of the world's largest NdPr producers outside China.

Nolans was discovered in the early 2000s by another company that delineated an initial resource and conducted some metallurgical test work. Arafura acquired the project in 2007 and has advanced it significantly, completing extensive drilling, piloting test work, and feasibility studies. In 2019, the company completed a definitive feasibility study that outlined a 38-year life of mine producing NdPr oxide. Arafura now has environmental approvals and native title agreements in place and is progressing with detailed engineering work.

Interview with General Manager of Projects, Stewart Watkins

Innovative Processing Method

Unlike many rare earth projects that struggle to process the complex mineralogy, Arafura Resources has developed a proprietary processing method perfected over years of pilot testing. This phosphoric acid bake process, which utilizes the project's high phosphate content, efficiently extracts the rare earth while also producing phosphoric acid as a valuable byproduct.

After an initial flotation step to produce a phosphate concentrate, the ore undergoes leaching with phosphoric acid. The rare earths are then precipitated out by heating the solution. After removal of the rare earths, sulfuric acid is added which allows the excess phosphoric acid to be regenerated for leaching more feed. This elegant process minimizes acid consumption while converting the phosphates in the ore to a merchant-grade phosphoric acid that Arafura can sell.

The rare earth sulfate solution then goes through further purification and solvent extraction steps to produce a high-purity NdPr oxide product. Arafura Resources has extensively piloted these separation steps, giving confidence in producing on-spec oxide. Overall, the process is truly optimized for the Nolans ore and achieves impressive recoveries of over 85% for NdPr oxide.

Significant Byproduct Credits

A key aspect of Arafura Resouces flowsheet is the production of phosphoric acid as a byproduct, which generates significant credits. At current phosphate pricing, this phosphoric acid byproduct is forecast to provide around 14% of Arafura's total revenue. There is also potential to recover uranium from the process, which could provide further credits depending on uranium prices. These byproduct revenues are crucial in reducing operating costs for rare earth production.

Advanced Project Development

Arafura Resources has been systematically advancing Nolans for over 15 years, which provides a high level of confidence in the project parameters. The company has completed detailed piloting, feasibility studies, permitting, and now has commenced early engineering and design work.

The definitive feasibility study was completed in 2019 by a tier-one engineering firm and incorporates data from the extensive piloting. It defines a 2 million tpa operation with a 38-year mine life producing 4,440 tpa of NdPr oxide. Forecast capex is US$1.013 billion, putting Nolans among the largest rare earth projects globally. Operating costs are estimated at US$24.76/kg NdPr oxide, which is competitive with peer projects. At an NdPr oxide price of US$72/kg, Nolans generates impressive financial metrics, including an after-tax NPV8% of US$1.73 billion and an IRR of 23.2%.

Arafura Resources has already received environmental approvals from the Northern Territory and federal regulators related to groundwater, radiation management, and other aspects. Native title agreements are also in place with traditional landowners. The company has now commenced early engineering and design work ahead of a final investment decision targeted for 2023. Detailed engineering by late 2022 will allow Arafura tResources o obtain lump sum construction pricing, greatly reducing delivery risk.

Strategic Alignment

The Nolans project is strategically aligned with the global push for supply chain security and localized rare earth processing. Arafura is targeting the European and East Asian markets where automakers and wind turbine manufacturers are seeking local rare earth supply. The company is joining key initiatives like the European Raw Materials Alliance to signal its commitment to sustainable and transparent rare earth supply.

Arafura Resources also plans to utilize offtake contracts and direct agreements with end users to improve financing options. The ability to secure debt financing from Export Credit Agencies relies on guaranteed demand from customers. Direct off-take deals with major manufacturers will therefore be crucial to funding Nolans' development.

Strong upside potential

As the Nolans project advances toward construction, Arafura Resources represents a compelling investment opportunity. The company's $300 million market capitalization compares very favorably to the project's NPV of $1.7 billion. Successful funding and offtake deals could prompt a significant re-rating of the stock.

Several factors make Nolans a stand-out rare earth project globally:

• Proprietary processing method allows high recoveries and low costs
• Significant byproduct credits from phosphoric acid production
• Large-scale 38-year asset with competitive operating costs
• Advanced stage of development de-risks execution
• Strategic alignment with Western supply chain localization

For investors looking to capitalize on the accelerating EV adoption and renewable energy growth, Arafura Resources provides exposure to the vital rare earth sector. The Nolans project is poised to become a key link securing the NdPr supply chain outside China.

The Investment Thesis

Strong demand growth outlook for NdPr

Global demand for NdPr oxides is projected to rise rapidly driven by growth in electric vehicles, wind power, and other high-tech applications. Supply shortages are expected this decade as demand surges ahead of new mining capacity coming online. This supply-demand mismatch should lead to higher real NdPr prices, which are already up 60% over the past year. Many analysts forecast prices staying above $90-100/kg over the next decade. At these prices, Nolans would be tremendously profitable.

Potential for mine life extensions

The current Nolans plan focuses only on the Southern deposit area, but significant exploration upside exists from untested targets across the 120 sq km tenements. Over time, mining the larger Northern deposits could potentially double production volumes. There is geological evidence that the total orebody could be substantially larger than what has been drilled to date.

Strong financial position

Arafura has a very healthy working capital position, having completed an A$45 million capital raise in 2021. This provides funding to progress the project to the next major milestones. The company has also received indicative debt financing of US$300 million from export credit agencies.

Strategic investor appeal

Off-take agreements from electric vehicle and wind turbine manufacturers are likely. These groups may make strategic equity investments to secure supply, reducing financing risk. There is also potential interest from government agencies given NdPr's critical mineral status.

Arafura's current market capitalization of around $300 million is very low compared to Nolans' after-tax NPV of $1.7 billion. Successful de-risking of the project could prompt a substantial re-rating of the shares towards a valuation more in line with the project's NPV.

Arafura Resources offers an attractive means to invest in the rare earth boom and secure exposure to the NdPr market. As project development progresses, the company appears primed to generate outstanding returns for shareholders.