Rumoured US-China rare earths battle sets Arafura up for the long game
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Special Report: While speculation that China may ban rare earths exports to the US has spurred short-term interest in ASX-listed rare earths players, the longer-term ramifications could benefit this particular junior.
The US-China trade tensions have sparked some immediate interest, but longer term any plan by the Chinese government to stop exporting rare earths to the US could serve to drive investment by US players into the Aussies who stand out.
Arafura Resources (ASX:ARU) is one such small cap that will not only eventually be able to mine valuable rare earths but also separate them on Australian soil – something that potentially makes the company attractive to US investors.
Thanks to the US-China trade tensions, the company has enjoyed some nice share price appreciation recently, having jumped nearly 45 per cent since the start of the year.
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 product 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.
This would rank Arafura as the second largest NdPr producer outside of China.
“Shorter term trade issues are a little bit of icing on the cake because it starts to inject a little bit of panic buying in the market,” managing director Gavin Lockyer told Stockhead.
“That builds on market fundamentals which are looking very, very positive for NdPr.
“America isn’t the largest market for NdPr, but it still represents a good proportion of it.
“What trade tensions might do though is stir up investment from the United States into non-Chinese NdPr supply, and not necessarily from groups in the magnet supply chain.
“They might for example be specialist investment funds that have a mandate to source critical materials for US manufacturing and the like. This could be an upshot from the shorter-term trade tension thematic in the market at the moment.”
Demand for NdPr is forecast to outstrip supply within the next five years — possibly as early as 2020, according to Adamas Intelligence.
Last year China produced around 80 per cent of global NdPr supply and is estimated to account for 85 per cent of consumption.
But as a result of the Asian behemoth’s growing internal needs, it is forecast to become a net importer of NdPr by 2022 – around the same time Nolans is slated to start production.
Arafura is one of only a few potential new suppliers currently in a position to meet this expected shortfall.
The biggest issue for the US is its lack of supply chain.
“Even Lynas’s statement the other day about doing some refining in the United States is not going to solve the its supply chain issue overnight, not even close,” Lockyer said.
“It’s really all about attracting investment out of the United States into non-Chinese NdPr.”
The US-China trade war is also worrying businesses in Europe that, like the US, suffers from an immature NdPr supply chain.
Europe is one of the regions showing very strong interest in Arafura’s NdPr, along with Japan, South Korea and China.
The company has signed two non-binding offtake memoranda of understanding for its rare earth products, including NdPr, to date, which it is working to convert to contracts.