Arafura Resources Ltd (ASX:ARU) is developing the very large Nolans hard rock (apatite vein-hosted) rare earth project in central Australia.
It is a very advanced project, having completed over 10 years of studies and approval processes.
Hartleys has initiated coverage on Arafura with a speculative buy recommendation and a 12-month price target of 15 cents per share (current price: 8.9 cents).
The following is an extract from Hartleys’ research report:
Large volumes of NdPr oxide
Nolans will produce NdPr oxide. Volumes are large at ~4.4ktpa of NdPr oxide (around 10% of the current market), which is slightly lower than LYC.asx current production. Growth in the NdPr market is expected to be very strong based mainly on the outlook for electric vehicles. In addition, the strategic value of rare earths is becoming more mainstream, and ARU’s location in Australia should be a premium for reliable supply. Note, ARU’s current NdPr offtakes are all with large Chinese magnet manufacturers. The project is also expected to produce phosphoric acid and low value cerium product which, combined, are ~20% of revenue.
Current prices are too low to incentivise production
The current NdPr oxide price is ~US$42/kg, and we estimate that the project is not viable using spot prices. The ARU DFS assumed prices of US$75/kg, for annual EBITDA of ~$377m pa. Our model assumes LOM A$230m EBITDA pa using NdPr prices ~US$69/kg. The DFS estimates capex of A$1b and capital of A$1.15b. We assume a higher capital requirement in our model to err on the conservative.
Mine life extension
The reserve is based on the apatite rich ore, and the process plant has been optimised for only this ore. The lower apatite ore is stockpiled (~9mt). There is study work underway to determine how to process the low apatite ore and add it into the mine plan (extend mine life). Additionally, there is exploration potential near mine and at depth. Drilling is currently underway.
Approvals timeline – mining lease mid CY20?
ARU has received all environmental approvals but in order to be granted the mining lease must reach a formal agreement with traditional owners. This is expected to occur early CY20. On that assumption, it is possible the mining licence may be granted in mid-CY20. Once the mining licence is granted, financing (and in conjunction offtakes) will be the last hurdle for construction.
Initiate coverage with Speculative Buy
Using current NdPr prices, we estimate that Nolans is uneconomic. We believe prices need to increase to incentivise the supply to meet medium term (2025-2030) demand forecasts. Superficially there is substantial possible rare earth supply, and so procurement by end-users appears straightforward. The reality though of very long lead times to arrange environmental approvals and the high capital requirements suggest procurement will be much harder. It is possible that the market will be awakened by a very strong price shock (as has happened before). Geopolitical risks suggest it is possible that industry could move earlier than usual to secure such supply. A key catalyst for ARU will be when and if the Company can demonstrate binding offtakes for the NdPr. This is a risk given it requires multiple counterparties. We initiate coverage with a Speculative Buy recommendation.