A summary of ARAFURA given recent policy

A New Chapter: Capturing Recent Whirlwind Events

In light of the chaotic events of the past few months, I decided to compile everything into a single post to make it easier to keep track. The sheer volume of developments has been overwhelming, so consolidating them seemed prudent.

Background on Rare Earth Investments

Investing in rare earth elements is a complex venture, often requiring a pilot plant to supply finished products to potential customers, followed by a comprehensive Front-End Engineering Design (FEED) to confirm capital expenditures (CAPEX). For many aspiring rare earth miners, having the product isn't enough; the real challenge lies in confirming the chemistry and producing the finished product (Rare Earth Oxides - REO) at one site, a process that can take around 18 years on average.

If you encounter companies touting drill results or even a Bankable Feasibility Study (BFS), understand that they are still in the early stages. It's crucial to ask about their pilot processing plant and the purity of their finished product. Note that securing financing typically adds another 3-5 years to the timeline.

Importantly, avoid investments involving China in any capacity with reagrd to rare earths—be it as part of the process, or as shareholders or directors. The Western world is moving away from Chinese involvement to ensure supply certainty.

Key Considerations

While this post highlights several important factors, it is not exhaustive, nor financial advice.

The 2024/25 Federal Budget

Arafura Resources Limited (ARU) emerged as significant beneficiaries of the recent federal budget. The Processing Cost Rebate policy (link below), produced late last year, offers a 10% rebate on processing costs for the first ten years. For instance, if net costs are $40/kg, the rebate effectively reduces it to $36/kg, enhancing competitiveness and profitability for ARU's stage 2 expansion. It appears Darryl Cuzzubbo’s projected cost (recently noted in the quarterly) of $35/kg might already include this concession.

https://amec.org.au/ptc-resources/

Moreover, the budget allocates up to $1.2 billion in cash grants to mining companies for "priority critical minerals projects," although specific allocations remain confidential for commercial reasons.

MINHUB & Stage 2 Expansion

Last week, Prime Minister Albanese announced $566 million for geomapping new critical minerals and rare earth deposits, which will benefit ARU’s Nolans project and the MINHUB initiative. The recent news of Cadoux acquiring a 50% stake in the MINHUB, with ARU having the right to purchase the remaining stake, further solidifies this collaboration.

In ARU’s recent quarterly report, CEO Darryl Cuzzubbo mentioned that independent studies are underway, expected to be presented to the ASX in two months. The timing aligns with the processing cost rebate window (2027-2040), enhancing opportunities to pay down debt and expand operations.

Trade War Impacts

Recent tariffs by the Biden administration on rare earths, now at 25% for permanent magnets, are exacerbating the Western supply chain shortage. With limited genuine supply outside of LYC/MP, which are largely committed to Japan, ARU stands to benefit significantly from the East-West trade tensions.

The ongoing trade conflict between China and the US is driving a wedge in the rare earth supply chain, opening opportunities for non-Chinese suppliers like ARU. This could result in a de facto Western monopoly on rare earth supplies.

https://www.whitehouse.gov/briefing-room/statements-releases/2024/05/14/fact-sheet-president-biden-takes-action-to-protect-american-workers-and-businesses-from-chinas-unfair-trade-practices/

Institutional Shorting and Market Dynamics

Institutions might be shorting ARU shares, creating liquidity to take long positions when debt/equity announcements are made. This strategy suggests confidence in ARU’s long-term prospects.

Insights from AFR

According to the AFR, ARU CEO Darryl Cuzzubbo emphasized that encouraging downstream processing in Australia will retain value-add, jobs, and skills domestically. Government support is crucial for maintaining competitiveness against overseas jurisdictions with similar policy reforms.

Price Elasticity

In the latest quarterly report, Darryl Cuzzubbo highlighted ARU’s potential to receive payments far exceeding the spot price due to significant Western demand. He argued that car manufacturers would pay a premium for secure supplies of critical materials, which could drive ARU’s expected revenues to new heights.

Media Perceptions

Media coverage often lacks depth, so it’s essential to read reports critically. Recent mentions of ARU suggest media awareness but not necessarily comprehensive understanding. Noting that Rare Earth industry is at its infancy stage in the west. The Western world is only now catching up on its critical role in the economy.

https://www.abc.net.au/news/2024-05-14/whats-the-impact-of-a-made-in-australia-future/103847616

Merger/Takeover Prospects

ARU's strategic positioning and extensive government support make a takeover unlikely. The government’s significant investment in ARU is aimed at protecting Australian interests and preventing foreign takeovers. The fineprint will reveal this information, but for now its very unlikely the contracts will allow all this funding to be shipped off of foreign or individual benefit. Its a case of national security.

Competitive Landscape

ARU’s decision to establish a supply chain independent of China has been complex but strategic. Competitors like Hastings, with Chinese ties, will likely face challenges securing Western government support. In contrast, ARU’s Western supply chain focus places it in a strong position with limited competition.

Potential Equity Providers

Potential equity providers for ARU’s project include entities like POSCO International, which aims to break away from China’s monopoly by sourcing raw materials from the US, Australia, and Vietnam. Government investment in the project is also possible, given their significant risk exposure. In short POSCO have a western supply chain Rare Earth contract of over 1 trillion dollars to fill, whilst the Australian Government have invested heavily.

https://www.koreatimes.co.kr/www/tech/2024/05/129_370466.html

My personal Conclusion

With the current geopolitical climate and strategic moves by ARU, the company is well-positioned for long-term success, as ARU’s prospects look promising amidst these global developments.