Valuing ARU

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It has been a while since someonehas tried to value ARU. I have rebuilt my NPV model for ARU given the newinformation to date.

Notes on my model:

-I have used information from the DefinitiveFeasibility Study (DFS) (7 February 2019) and updated for recent events.

-My model tries to broadly look at the cash flows for23 years (mine life). It is quite a ‘coarse’ approach but the results arebroadly in line with the results of the DFS which would have generated itsresults from a much more detailed model.

-I’m not a tax specialist, so I have tried to beconservative with the tax assumptions.

-I’m unsure how much Phosphoric Acid is to be sold (ierevenue) and how much is retained to offset the opex costs. This is not clearin the DFS. But even if I am wrong, it is only a small amount in the totalrevenue <5%.

-I have used a discount rate of 10%. I think this isquite conservative (especially given the Govt backing). But I have kept it at10% which was also used in the DFS.

-For those of you running your own model, be verycareful with currencies and units. Lots of data is provided in Chinese, USA andAust. And different units like Kg, Tonnes etc.

-It does not factor in the dilution that will happen inthe final equity raise.

Key points to note:

⁃NdPr Pricing - The NdPr price obviously is keyto the profitability of ARU and its corresponding Share Price. So to invest inARU you need to take a view of the future of NdPr pricing. So I note thefollowing on NdPr pricing:

oARU will have lowest opex cost to produce NdPr. So itwill have higher margins but also importantly, if the China tensions disappear(unlikely) it can ride out the troughs of NdPr pricing. Also, there is only solong China can sell NdPr at a loss. Or if they do, it will make westerncountries nervous. They are backing themselves into a corner with this pricesuppression strategy.

oARU has locked in NdPr Pricing in its offtakeagreements that are well above current spot market pricing. This means ARU willbe profitable in the short term.

oNdPr demand is growing (even with the recent mediasaying it is not). And there are just no other NdPr projects coming online soonat scale. This will give monopoly type pricing power for ARU for its remaining15% of supply. And if we can ramp up production, just adds to theprofitability.

oThe USA (and soon Euro) China tariffs will createlarge demand. These tariffs could be increased if Trump wins. This is a massivetailwind for NdPr pricing. I’m yet to estimate the impact of these policies.But I would expect it to be quite large. Again….this is NOT factored into mymodel’s assumptions.

⁃Additional Revenue - ARU should be able to processother companies’ deposits (Minhub?). This is another revenue stream notfactored into the model. We have asked ARU to clarify what it can do in thisrespect. Also, ARU have stated they will seek approval for Phase 2 for Nolanswith much more NdPr below 200m. Either of these events will warrant a rerate ofthe SP.

⁃Cost Overrun Risk - Much of the risk for a rare earthproject is getting the processing plant working as designed. Lynas had massiveissues in the early days. ARU has been on a 20-year journey. So there has beena lot of work done in this space. And the Cost Overrun Facilities provide a good-sizedbuffer should things not be quite right. So I think this risk has been managedquite well. But something to keep an eye on towards the end of construction andinto the ramp up phase.

⁃Processing Cost Rebate - The 10% government ProcessingCost Rebate is great. But if it is removed by the Liberal Party, it will nothave a massive impact on ARU.

The ARU Model:

Here is a screen shot of theinputs/outputs from my ARU model:

Conclusions (in my opinion):

-The modelled cashflows show a SP around $1.00-1.50 isrealistic.

-NdPr pricing is likely to be strong given the currentand prospective geopolitics and commitment of Governments to the energytransition.

-ARU has great potential for additional revenues (moreNdPr onsite, additional processing of others, acquisitions).

-Senior management’s incentives aligned with shareholders.

-Strong environmental credentials.

I look forward to your constructiveand polite feedback/thoughts.