Arafura Rare Earths Ltd, page-1152

This Article 12 months old - BUT a good read
Surely ARU will be able to deliver Rare Earth at a lower Opex of US $25.94 /kg ( BELOW this is considered very low for NdPr globally - but probably more now in 2024 ) than Lynas by a LONG way .
Especially considering Energy Costs significantly lower ( Heating / baking to only 250 degree compared to a LONG 300m Bake at 700 degrees for Lynas ? ) and with ARU installing a huge Solar Panel array once up and running , with the dividend from the Phosphoric Acid to help offset costs
How could Lynas even compete with ARU when up and running ?

Why invest in the rare earth mineral sector:

• Governments globally committing to energy transition.
• Hard to pick winners from the manufacture or operation of solar/wind/electric vehicles sectors. However, they all need minerals to be produced.
• All the minerals (Copper, Cobalt, Lithium, Aluminium, Graphite and Rare Earths) will see a large upshift in volume. However, due to substitution effects, many of the minerals will only see modest price increases.
• However, it is hard to substitute Rare Earths because the magnets produced by rare earths are the highest performing, most efficient for motors.
• There is also scarcity of rare earths because there has not been any investment in rare earths for 15 years due to China cornering the rare earth market (85-90%).
• Also it takes significant time for rare earth mines to begin production – typically 16 years from discovery to production.
• Due to geopolitical reasons/reshoring issues, the western world wants rare earths from safe western alliance countries.

Why ARU?

• ARU is the only major/material rare earth company about to begin production (3 years away).
• ARU will be mined and processed near Alice Springs.
• Low geopolitical risk
• Mined and processed with high ESG standards when compared to China. Many companies are looking for ethical mineral supply. This is likely to increase over time.
• Location is near Alice Springs which makes it easier to:
• Attract quality staff (ie close to town with schools etc.)
• Road/Rail infrastructure is close by reducing capex/opex
• Cornerstone investor – Gina Rinehart ($60m at a SP of $0.37 for 10% of ARU).
• Initial Offtakes almost complete:

• Financial Investment Decision due soon.
• Capital Raise completed with establishment works underway.
• Not likely to be another Capital Raise unless there are cost overruns (this would be known around mid 2025).
• 
  

Valuing ARU - #valuation

ARU’s Definitive Feasibility Study (DFS) used the following assumptions:

• Capex of $1b including contingency
• Opex of US $25.94 /kg (this is considered very low for NdPr globally)
• Mine life of 23 years
• Discount rate of 10%
• NdPr priced at US $ 67 -90 /kg over the life of the mine
• Annual production of 4,357 tonnes

They get an NPV of A $729 million which would equate to a SP of about $0.30 - $0.40. Current SP is about $0.25. Breakeven would mean the NdPr price is around US $55 /kg.

However, if you look at the following NdPr prices and corresponding NPV/SP you can see how sensitive it is (note all approx.).

So we need to look at the long term pricing of NdPr.

Some factors at play:

• The geopolitical two-tier pricing of NdPr will likely mean ARU will get a premium for being ex China supply. Not in the short term because the companies signing up to the initial offtake agreements know they can source their NdPr from China. But in the long term ARU should be able to charge a premium.
• ARU will also get a premium for its strong ESG. Most of China’s supply are from African and Myanmar where health, safety and environmental concerns are largely ignored.
• Energy Transition rate of progress forecast means there is a massive supply gap of NdPr. Currently neodymium has global revenue of approx. $0.5 billion in 2022. And By 2030 this is expected to be $7 billion. This is a x15 increase in 7 years!!!
• Due to the historic lack of investment in rare earths, it will take at least 10 years for the market to bring new mines online into production.

So the current NdPr price of around US $80/kg could be considered low.

Since *** asks for a valuation, I believe that in the near term (ie next six month or when Financial Investment Decision/Finance is achieved) ARU should be valued at about $0.70 – 0.90. I think during construction the market will probably get bored…and then the SP could fade. Also there is the risk of cost overruns or delays. So that may also cause downward pressure on the SP. But once production begins and ARU is ramped up….I believe that a SP of around $1.20 is realistic. This would be around 2027.

Key risks

• Key risks are that China will push down rare earth prices. This has happened to the NdPr prices over the last 6 months (US $145 /kg to around US $70 /kg) and is most likely to happen again to try to dissuade investment in new rare earth projects. But geopolitics should create a two tier rare earth market. China/Russia and Western Alliance countries. Western Alliance country rare earths prices should go very high in the next 10 years until other western sources can be brought online.
• Another key risk is if governments decide to slow down the energy transition. This is unlikely, but even if they slow it down, rare earths will be in high demand.
• Substitution is also a risk, but the magnets produced by rare earths are the highest performing, most efficient for motors. There is a cost/benefit calculation when substituting rare earths for less effective alloys (like Elon Musk’s recent comments about Ferrite in their motors). But that price point should be quite high unless they can find a larger/lighter form of battery. Which would be 10-15 years away from commercial viability…if they discovered now.

Other considerations:

• The initial offtake agreements appear to be linked to the China supply prices. So we need to think about what China is likely to do. China is going to need to re-start their economy. And they are likely to invest in projects that decarbonise their industries. Thus the internal NdPr demand is likely to be high.
• China has also previously restricted supply of NdPr to Japan over a dispute. If this were to happen again, then ex China NdPr prices will rise massively.
• Other sources of revenue could also increase revenue such as processing other rare earths for other businesses (lots of Australian mineral sand companies could use this processing plant). There have already been some ARU announcements regarding this. This has not been included in the valuation analysis above.
• Mines have typical investment patterns. I forget the term for it. But right now we are in the down turn waiting for the FID/Financing. There is likely to be a jump in SP when that happens. Management have previously said FID/Finance was to be done by end of June 2023. That came and went. And the SP is getting punished. They have now said second half of 2023. Having worked on large deals with many different sources of funding, I can understand why it is taking a long time. Also they are dealing with Credit Export Agencies from respective countries. There is also another likely down turn before the plant is built and production begins. Especially if there are delays.

Conclusion:

• I think ARU has great potential in the near and long term.
• I think it is currently undervalued.
• I think in the next six months it will move up rapidly from the current $0.25 to around $0.70.
• In the next three years could downward trend before it begins production.
• Then once steady state production is achieved (about 4-5 years from now) it should start producing healthy dividends.