Arafura Resources has NdPr supply alternative amid US-China trade war

Snapshot

US-China trade jostling is an opportunity to advance the Nolans rare earths project as a potential new source of critical minerals for North America.

Arafura NdPr strategy

Quick facts: Arafura Resources Ltd

Price:  $0.08 

Market: ASX
Market Cap: $77.36 m
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Mar ’19May ’19Jun ’19Jul ’19Aug ‘190.050.10.15032MZoom1m3m6mYTD1yAllFromFeb 4, 2019ToAug 4, 2019Highcharts.comView company profile

  • The company’s Nolans DFS put mine life at 23 years
  • Nolans was valued at $729 million (US$497 million) with a 17.43% IRR
  • Product offtake discussions are continuing
  • Project financing discussions are hoped to wind up in the December quarter
  • A start to construction is targeted for 2020, with commissioning in 2022

What does Arafura Resources do?

Arafura Resources Limited (ASX:ARU) (FRA:REB) (OTCMKTS:ARAFF) specialises in exploration and development in Australia’s Northern Territory.

The company is run by Gavin Lockyer, a chartered accountant who has more than 20 years’ experience in the resources and finance industries.

Lockyer’s experience includes international banking roles at Deutsche Bank London, ANZ and Bankwest.

What does Arafura Resources own?

The key asset is the Nolans Neodymium-Praseodymium (NdPr) project, which lies north of Alice Springs, near the Territory’s gas pipeline.

Nolans is on a main highway to Darwin port that meets a railway which also connects to the port.

The company banked $23.2 million in a rights issue that closed in July 2019.

Arafura published its definitive feasibility study (DFS) for the project in February 2019, valuing the primarily NdPr oxide project at A$729 million using an after-tax net present value (NPV10) calculated at a 10% discount.

The DFS is highly leveraged to NdPr prices and every US$5 per kilogram increase in the NdPr oxide price increases NPV10 by A$130 million.

Nolans project has an A$1 billion capital cost and A$48.40 operating cost per kilogram that reduces to $36.85 once an MGA credit is added.

The after-tax internal rate of return is 17.473%, with the 23-year project paying back its investment on an after-tax basis at the five-year mark.

Arafura’s Nolans DFS models a technically strong and cost-competitive project tipped to generate an average of $377 million EBITDA each year over the long mine life.

Arafura took two extra months with the study but was rewarded with results, increasing the previously forecast average annual production of NdPr oxide of 4,357 tonnes by 21% to make Nolans a significant, long-term NdPr development project.

The company was also able to work on costs, to position itself as a probable ultra-low-cost producer able to sit in the industry’s lowest cost quartile for production.

The modelled project includes a mine, process plant and related infrastructure to be located at the Nolans site.

Nolans is a sizeable, low-risk mineral resource that could supply a significant proportion of the world’s NdPr demand.

A reserve of 19.2 million tonnes grading 3.0% total rare earth oxide (TREO) and 13% phosphate was used in the feasibility study, having an NdPr enrichment factor of 26.4%.

China produced about 80% of global NdPr supply last year and accounts for about 85% of consumption.

The Nolans project could offer an attractive alternative supply of the critical mineral from a Tier 1, Western jurisdiction and thereby change the risk model of the clean energy industry across the globe.

The NdPr oxide used in NdPr-based Neodymium Iron Boron (NdFeB) magnets is sourced from a few, predominately Chinese, suppliers of NdPr oxide and the Nolans project offers a viable alternative supply option for the growing industry.

Arafura hopes to continue product offtake discussions throughout the remainder of the year and wrap up project financing discussions this October.

The company is targeting a 2020 start to construction, with a view to commissioning the project in 2022.

Arafura also has a 60% interest in the Bonya tungsten and Jervois vanadium projects in the Northern Territory with both held in joint venture with Thor Mining PLC (ASX:THR) which owns the remaining 40%.

Thor unveiled strong tungsten and copper results last month from drilling at Bonya and Arafura is seeking project-level investors to advance Jervois through resource development and subsequent feasibility work.

Inflection points

  • Progress of project financing discussions for construction of the project up to October this year
  • Continued product offtake discussions with potential users downstream this year
  • Outcomes of US national decision-making on the importance of internally or Western nation sourced critical minerals such as rare earths
  • Progress of regulatory approval applications in the Northern Territory
  • Availability of construction and commissioning staff and contractors and the state of the industry generally

US-China trade tensions could prompt project funding, says MD Gavin Lockyer

“From our side of things, trade tensions between China and the US (are) actually not a bad issue because it’s actually bringing a lot of awareness to the rare metals space which is what Arafura is focused on, so it’s good in a bad way I guess,” Arafura managing director Gavin Lockyer told Proactive Investors in June.

“Globally it’s not a positive thing but for Arafura it has brought a focus to us and our sector.

“We’ve just completed our feasibility study for our project this year and we’re looking for significant investment from non-Chinese organisations that have a strategic interest in rare earths in the supply chain.

“We see this as a great opportunity for us to be able to actually get our project financed and into construction.”

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