Special Report: Paterson Securities head of research Cathy Moises has identified Arafura Resources (ASX:ARU) as one of the best ways for investors to play the rare earths thematic brought into sharp focus by Wesfarmers’ surprise $1.5 billion takeover bid for Lynas Corporation (ASX:LYC) last month.

Arafura’s Nolans Project in the Northern Territory is forecast to produce the bulk of its revenue (85 per cent, to be precise) from sales of neodymium-praseodymium (NdPr) oxide, a rare earth compound used to make ultra-strong permanent magnets for micro-motors and the drivetrains of electric vehicles.

Based on a definitive feasibility study (DFS) completed in February, Nolans will produce 4,357 tonnes of NdPr oxide per annum at an average cost of US$25.94/kg for an initial 23 years.

At around two-thirds of Lynas’ current annual output, this would rank Arafura as the second largest NdPr producer outside of China.

Initiating coverage on Arafura this week, Moises said the meaningful production forecast to come from Nolans and the project’s advanced nature meant the company was “in the box seat” for “when the NdPr dam bursts and users are scrambling for supply”.

“Industry experts such as Roskill and Adamas are forecasting very significant price increases over the next 10-15 years, reflecting the demand brought on by increasing production of EV vehicles,” she said.

“Whilst the NdPr price seems determined to track lower in the short term, supply shortfall will inevitably drive the price higher in the medium term.

“With LYC currently the only non-Chinese producer of end product in meaningful volume, and the long lead time to development and capital intensive nature of developing a fully integrated processing facility, companies with advanced projects such as ARU’s 100% owned Nolans are well placed to benefit.”

Geotechnical test pit excavation at Nolans process plant site (Supplied)

Funding challenge not insurmountable

The February DFS estimated Nolans will cost more than $1 billion to build, which is a daunting figure for a company whose market capitalisation is currently around $40 million.

But Moises could see a scenario in which the funding challenge is overcome.

She cited a number of options Arafura could pursue including funding connected to offtake, leasing of high value specialist equipment, government-backed direct loans and a partial sell-down of the project.

“The recent interest of Wesfarmers in LYC highlights the interest the market has in the EV space, and we feel the size and quality of ARU’s project should see a funding solution,” she said.

“Given the low market capitalisation and significance of this project to global production, we are surprised that Wesfarmers didn’t show some interest here instead of LYC.

“We feel the lack of non-Chinese opportunities to secure supply should see end users and magnet producers likely to help fund this project to give surety of supply.”

Rare earth processing pilot plant (Supplied)

Advanced project in safe jurisdiction

Unlike Lynas, which has a mine and preliminary processing facilities in Western Australia and a refinery in Malaysia, Arafura intends to locate all aspects of its operation at Nolans, 135 kilometres north of Alice Springs and just off the Stuart Highway.

The company has been granted environmental approval at Territory and Commonwealth level and is developing a comprehensive Mining Management Plan as part of the process of securing Mineral Leases (MLs) and final mining authorisation for Nolans.

Arafura anticipates the near contemporaneous grant of the MLs and issuing of the mining authorisation before the end of the year.

This story was developed in collaboration with Arafura, a Stockhead advertiser at the time of publishing.
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