Arafura Resources (ASX: ARU) - Technical Analysis

Arafura Resources Limited is an Australian mineral exploration company focused on rare earth elements. The company was founded in 1997 and is headquartered in Australia. It 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.

Merlin Marr-Johnson caught up with Stewart Watkins, General Manager Projects, Arafura Resources. Mr. Watkins has over 25 years of experience across various facets of the mining industry including operations, engineering, consulting, project development, and management. This comprises a wide range of roles including corporate and business management, business development, project/study management, process design, commissioning, and process plant operation.

He has technical experiences in the areas of mineral dressing, flotation, hydrometallurgy, and pyrometallurgy in commodities as diverse as base metals, iron ore, mineral sands, gold, and uranium, both in Australia and internationally. Prior to joining the company in 2018, Stewart gained business experience that included being a partner in Intermet Engineering, which was later acquired by Sedgman Limited in 2007.

He has also held executive project development roles at Continental Nickel and IMX Resources, with a focus on strategic planning, investor relations, and financing. His educational credentials include a Bachelor’s Degree (Honors) in Chemical Engineering. He is a Fellow of the AusIMM. 

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. This is a rare earth project focused on Neodymium and Praseodymium, which are collectively called NdPr. The project has the capacity to develop and produce around 4,500t per annum, which accounts for 6% of the world’s production. NdPr is a vital metal for making permanent rare earth magnets that are pushing towards the electrification of transport, wind turbines, and modern technology. 

The Nolans Bore Project

Nolans Bore rare earths-phosphate-uranium-thorium (REE-P-U-Th) deposit will encompass a mine, a process plant (comprising beneficiation, extraction, and separation plants), and related infrastructure to be constructed and located at the Nolans site. The project is underpinned by low-risk mineral resources that have the potential to supply a significant portion of the world’s NdPr demand. This project is globally significant and has strategic importance. Once developed, the project will become a major supplier of these critical minerals to the high-performance NdFeB permanent magnet market. 

The Nolans project was discovered in the early 2000s. Rare earth projects usually take longer to be developed. In early 2000, drilling was initiated at the project and a resource was developed. This was followed by the start of a metallurgical test work program. During this time, the company moved through a couple of flow sheets. 

In 2012, an extensive drill program was conducted, leading to a significant increase in the resource. However, the company realised that the operating and capital costs were too high. This made the company realise that the current flowsheet wouldn’t work in this environment. 

Around the time the first flowsheet was developed, there was a price spike in the market. This short-lived spike in prices was unlike the current prices which are rising at a steady pace. The prices peaked at $300 a kilo for NdPr oxide. As a result, the company went back to the drawing board in an attempt to understand the ideal strategy to proceed ahead. 

It is important to note that every rare earth deposit is fundamentally different in its mineralogy and chemistry. In 2015, Alex Elliot, Manager, Technology, Arafura Resources helped develop the acid pre-leach process, which was key in unlocking the ore’s potential. The Definitive Feasibility Study (DFS) was initiated around the same time as Mr. Watkins joined the company in 2018.

Arafura Resources conducted a 4-year metallurgical pilot program on the project. The program concluded during the ongoing Definitive Feasibility Study and helped instil confidence in the company’s flowsheet. 

The Rare Earth Market

There was a time when rare-earth was majorly produced in the US and Europe. However, in the 80s, the primary rare earth production became centred in China. There were multiple French companies working in the rare earth space that eventually moved all production facilities to China. Notably, China had large deposits of rare earth metals. Prior to the boom in the early 90s, there was no production outside the country. 

When Linus Corporation came on board with Arafura Resources in 2011, the former was the first and largely the only integrated producer outside of China to separate the rare earth oxides. Since Linus Corporation produced separated rare earth oxides, it was able to operate independently. In case a concentrate is produced or a mixed rare earth carbonate, it has to be sold in China so that it can be separated. 

Arafura Resources followed Linus Corp. and decided to build a value chain outside of China’s “Made in China 2025” strategy. The company worked on developing separated rare earth oxides and adding as much value as possible. 

The upside to this strategy was that all the company’s waste management was contained to a single site. Rare earths are known to carry a certain level of radioactivity. The company was able to carry out waste management at a single site through a chemical process. The company also ensured that it ticked all the green boxes for vehicle producers based in Europe and the US markets. 

The Manufacturing and Separation Process

Nolans Bore has apatite, monazite, and allanite, in essence, 2 phosphate minerals and a form of silicate mineral. The phosphate percentage in the ore is 13% P2O5 along with 2.9% total rare earths. The predominant rare earth mineral in the ore body is apatite. The monazite tends to occur as micro inclusions within it. Higher metamorphic grades of allanite are present towards the edge of the ore body where alteration is observed. The company realised that, unlike other rare earth deposits, it cannot produce a high-grade rare earth concentrate from beneficiation. 

Though the company can produce a high-grade phosphate concentrate, it would need to take the chemical route to unlock the rare earth. This led to the development of the phosphoric acid pre-leach process. This process was developed in-house and patented by the company. It allows the company to leach the phosphate out of the ore, separate the rare earth before the phosphoric acid is regenerated. The regeneration of the phosphoric acid is done once the rare earths have been removed. This allows for recycling of the chemical to leach more phosphate ore and take the excess phosphate to produce merchant-grade phosphoric acid which is a fantastic by-product. About 13%-14% of the company’s revenue comes from phosphoric acid export, as per the DFS. 

The ore comes in the front end of the extraction process which is carried out through a simple single-stage flotation to produce a high-phosphate concentrate. Following this, the concentrate is leached. 

The rocks here are of medium hardness and require a 150-micron grind. It is separated through an open circuit roughing flotation, the simplest kind of flotation process available. 

The concentrate is leached in phosphoric acid under a controlled environment. Here, the temperature is controlled to ensure to keep certain things in the solution while also keeping other things out. Following the separation, the company takes the solids and heats them, leading to precipitation. The precipitation and bake allow the separation of rare earths. Next, the company regenerates the phosphoric acid with sulphuric acid to produce the phosphoric acid that is used in leaching. The excess leaching acid is used for cleaning up the impurities, leading to the reduction in overall water content. The resultant chemical is then shipped out through the Darwin Port to India. 

The leached residue is baked by using sulphuric acid. The company doesn’t need to boil the acid at 700 degrees like other players in the market. This is because it isn’t looking to remove the excess sulphuric acid from the solution. The next process involves water leaching where everything is put into the solution and the company takes out the liquor featuring the rare earth sulphate. Next, the company puts the solution through the second part of the process which is patented. Here, the company adds a chemical that causes the rarer sulphate to precipitate without neutralising the acid. 

For each ton of residue, the company mixes 1.6Mt of concentrated sulphuric acid. This leads to the formation of a paste which is then heated to 250 degrees. In the case of Linus Corporation, an acid bake is used. Here the paste is mixed and heated to 700 degrees, leading to a dry discharge from the kiln. Linus Corp. has 200-300 metre long kilns, while Arafura Resources carries out the process through a paddle dryer. 

The paste is then introduced in water which allows the separation of the solids and the liquids. The solids go to tailings, while the liquid comes to precipitation. Once the rare earth sulphate is precipitated, the solids and liquids are separated. At this point, the liquified mixed acid is 10% phosphates leftover in the material along with 20% excess sulfuric acid. This acid mix is used for regenerating the phosphoric acid in the pre-leach. The excess acid is added into the bake which ends up leaching apatite and making phosphoric acid a by-product. This process is highly cost-effective and significantly reduces the company’s operating costs. 

The rare earths are precipitated as hydroxide and purified through the use of magnesium and other minor chemicals to remove impurities. Next, the rare earth hydroxide is leached by using hydrochloric acid. The company carries out a differential leach where all the lanthanum, neodymium, NdPr, heavy rare earths are leached, leaving behind cerium hydroxide. 

The company does not need to carry all the cerium into the solvent extraction circuit. Cerium has the biggest mass of rare earths in the circuit. It is purified mainly to recover any lost NdPr. This is because cerium isn’t worth a lot, while the NdPr production is growing worldwide. The company anticipates that the market pricing for cerium doesn’t seem to be going up in the near future. However, it has the option to produce cerium in the future, if required. 

Following this, the company takes the rare earth chloride and evaporates a part of the water content. The resultant solution is then put through a very small SX circuit that helps remove the sag samarium, europium, gadolinium, and heavy rare earths. Next, the solution goes through another solvent extraction circuit that removes the NdPr which can then be precipitated out using oxalic acid and calcine off into a rare earth oxide. 

Process Testing

Arafura Resources has run 4 years of piloting on this flowsheet. This started out with 15t-20t ore from Nolans which was obtained through large-diameter bore drilling. The material was put through every stage of the flowsheet. Since there were 7 stages in the process, the company carried out the work in stages. The company did not need to build an integrated pilot plant as it wasn’t required. The final NdPr product is sent off to metallization partners that develop the product into NdPr metal. Next, the NdPr metal is sent to magnet manufacturers to produce permanent magnets. The metallization partners and the magnet manufacturers have been highly satisfied with the company’s product. 

There are 3 main processes that are used for separating rare earth oxides. There was a process developed in France where the company used a nitric acid process where the rare earths are dissolved in nitric acid and separated through solvent extraction. 

Linus Corporation utilises the sulphate process for separation. Both of these processes are highly cost-intensive and require a huge plant and high operating costs. 

Meanwhile, Arafura Resources utilises a hydrochloric acid process. It works with a rare earth chloride that can be run on a smaller scale as it is run at much higher concentrations. As the process isn’t simple, the development wouldn’t have been possible without piloting. When the flow rates, concentration, and temperature is stable throughout the whole SX circuit, the chemicals are stabilised and tend to work really well. Arafura Resources ran the pilot plant at ANSTO (Australian Nuclear Science and Technology) for the separation circuits. This pilot ran for 2 weeks and produced really good quality material in the end. 

It was important for the company to precipitate out the final product. As the company was aiming for a 99.5% rare earth oxide product, it couldn’t afford to have any sodium, chlorides, or sulphates in the final product. This is a fairly complicated process and the company is currently building it into its design. The company has 7-day liquor storage in front of the solvent extraction. Once the solvent is stabilised, the company can keep running the process regardless of what is happening in the rest of the circuit. 

Partnerships and Associations

Arafura Resources has metallization partners in Vietnam, Thailand, and China. Notably, China is the largest permanent magnet producer in the world. As a result, there is a high chance that the company’s product will pass through China at some point in its lifecycle. 

It is important to note that in a rare earth oxide, the various stages after the metallization of the magnet manufacturer are not proprietary and the development costs for these processes are reasonably moderate. Arafura Resources is developing its sales model by working with the end customer. 

The company is looking to enter contracts with the metallizers, the ones responsible for making the rare earth metals. Meanwhile, the end-user will enter a contract with the magnet manufacturer. The oxide will be sent to the metallizer by the company, which will be delivered in the metal form to the magnet manufacturer. Next, the manufactured magnets will be delivered to the end-user. Arafura Resources plans to have an offtake arrangement with the end-user. 

This arrangement will enable the company to work with the export credit agencies. This will also catch the attention of government agencies that are looking to secure strategic material for the country’s EV manufacturing. 

A Focus on Sustainability

Arafura Resources has received feedback from end-users demanding ESG (Environmental, Social, and Governance) credentials from all suppliers. The company is working on blockchain technology and is a member of ERMA (European Raw materials Alliance). Additionally, the company is also a part of the UN Global Compact. The company is dedicated to an environmentally-conscious operation. 

Quality Control

Arafura Resources carried out geo-metallurgical mapping, leading to reengineering while going from the Feasibility Study to the Definitive Feasibility Study. 

This was done during the early stages of the DFS where the company took individual intersections from the drill core and identified the underlying geology and grades of each section by way of a flotation test. The company assessed each section through variability testing. 

It found massive reserves of apatite mineralization which are labelled as type 1 and 2. Through testing, the company realised that the apatite simply floats as it is mostly devoid of other materials. Type 3B was found to float to a better grade, however, the recovery starts to drop away as low-grade material comes in.

Meanwhile, type 5A featuring allanite is found at the edges of the ore body, or the area featuring alteration. Here, the rare earths have been pushed across into silicates. The company was looking to develop a model to understand the possible recoveries. For instance, even though the rare earth grade might be 2%, only 0.5% could be recovered. This leads to a significant reduction in the value of the block. 

The company was also looking to keep the separation plant ready when going into operation so that it can be steadily fed. This enables the company to work its way back through the flotation plant and blend from the mine. The constant running of the plant along with observation of the floatation performance allowed the company to keep the concentration steady over the short term. 

Permitting, Engineering, and Design

Arafura Resources realised early on that getting environmental permits is absolutely critical. In 2015, the company initiated the EIA (Environmental Impact Assessment). In 2017, The Northern Territory Government approved the EIS (Environmental Impact Statement) and granted the company an environmental permit in 2017. Since the asset also had uranium and thorium, it also had to get approval from the Australian Federal government, which was granted in 2018. 

In 2020, the company negotiated its Native Title agreement with the traditional landowners. This agreement was signed in a record time of 4 months. Additionally, the Northern Territory Government granted the company mineral licences. 

Currently, the company has submitted its operating plans to the government which is in the final stages of approval. The company’s project is nearly fully-permitted. 

At the engineering front, Arafura Resources raised $45M in August 2021. Following this, the company kicked off its front-end engineering and design. The company is working with Hatch Ltd, a firm that is well-known for its hydrometallurgical expertise for the front-end engineering and design for the hydromet plant. 

The company is taking the hydromet plant through to 60% design maturity. It is looking to spend a significant amount of capital in front of FID (Final Investment Decision) as it will allow it to approach tier 1 constructors in Australia and attain lump sum prices to build the project. This helps take away the price and schedule risk from the lenders and the company. The company is aiming for 65% of its costs at FID to be locked into a fixed price lump sum. 

Export credit agencies and government funding is expected to be unlocked once the company reaches FID. Notably, the NAIF (Northern Australia Infrastructure Facility), and EFA (Export Finance Australia) have committed $300M for Arafura Resources. This serves as a really good cornerstone piece of debt. Once the company has that surety of price, it will also be able to bring the export credit agencies on board. This will lead to the inflow of equity. 

Tailings Management

The uranium and thorium obtained during the extraction process end up in the tailings dam. Since all the chemicals are precipitated by the company, the uranium-thorium present in the tailings dam is going to be lower grade than the ore body. The company adds a pile of reagents and chemicals to precipitate the material. As a result, the tailings are slightly diluted by the time they are placed in the tailings. 

Through the Feasibility Study, the company developed the tailings dam design, allowing for progressive rehabilitation. It starts with 2 cells, following which, the company builds another two and caps off the drain. Next, a rock capping is placed on top. This leads to a progressive rehabilitation of the company’s 30-year reserve or 38-year life of mine. 

Financing Considerations

Arafura Resources has a $300M current market cap. The project CapEx (Capital Expenditure) is around $1Bn, out of which $300M is coming through debt. The company is looking to fund the remaining $700M through debt. One of the considerations is to move half of its production to Germany where KfW could cover the debt through a debt guarantee. 

Through offtake agreements, the company can work with multiple offtake partners to make this project a success. The partners can put the company into equity protection potentially at the company or project level. This would enable it to de-risk the project from an offtake and funding perspective. The remainder of the equity is expected to be had through a fairly significant re-rate on the share price. 

Arafura Resources has a strong team that has been built over the past 2 years. The project team has 30 members that are dedicated to delivering the project. This project has the potential to transform Central Australia. This intergenerational project will deliver for the indigenous population in Central Australia and for all of the Northern Territories. 

To find out more, go to the Arafura Resources website