Rare Earth Producer Arafura Resources Poised to Tackle $23 Billion Magnet Market

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The global rare earths market has been increasingly thrust into the spotlight of the mining world, and with good reason. As technological innovation continues to advance into consumer’s everyday lives, manufacturers rely more and more on the raw materials needed to produce these products.

While China’s dominance in this space is well known, the monopolistic setup has proven to be an untenable situation for the market, especially as China is the largest consumer of these same resources. There is now a significant need for alternative producers to smooth out the market’s balance between supply and demand.

For a junior like Arafura Resources Ltd. (ARU.ASX), the ability to leverage Chinese expertise as an Australian producer positions the company to effectively benefit from a rebounding market. What’s better is Arafura’s flagship Nolans Project has a compelling mix of rare earths that targets the $23 billion permanent magnets market.

 Equities.com had the opportunity to speak with Gavin Lockyer, Managing Director for Arafura Resources, to learn more about this opportunity and how the company intends to seize it.

EQ: Can you provide us with a brief overview of Arafura Resources and your current operations?

Lockyer: We’ve been exploring in the Northern Territory of Australia for over ten years, and the company was initially formed on the back of a range of elements, including gold and nickel. But our flagship project is the Nolans rare earth project. It’s situated about 100 kilometers north of Alice Springs, which is a modern town right in the middle of Australia that has a population of about 22,000 people. It’s well serviced with daily flights into all of Australia’s major capital cities.

The project’s well-serviced, but it’s also relatively isolated. We’ve got a lot of good infrastructure in place as well. We have a gas pipeline, which runs through the mineral lease, major road and rail transportation within 10 and 60 kilometers of the mine site, , and a significant groundwater resource just to the south of the mine, which we have only just identified ourselves.

EQ: Nolans Project is a compelling catalyst for Arafura right now. Can you tell us more about the property and prospects of the project?

Lockyer: With Nolans, we have a significant world-class resource, which we classify as low-risk. The reason that we can claim that it’s low-risk is that we’ve completed nearly 90,000 meters of drilling into it and a lot of that is with higher quality drill core. Most of the drilling is spaced at 40 metres, and some at 20 metres, so we have a very good understanding of the geology and the mineralization in the resource.

It’s a very large resource at surface that covers an area of nearly two square kilometers. And we know that it’s much, much bigger than we currently have identified, as it is open at depth. The tonnages that we are talking about here are very large, and that’s only in the top 220 metres.

It’s a JORC-compliant resource of 47 million tons that contains approximately 1.2 million tons of rare earths. Our target mining rate is to produce rare earths at around 20,000 tons per annum, which is very small when you compare it to some of the bulk commodities like iron ore or copper, but Nolans is a strategic asset, and rare earths go into many varied and highly technical applications.

One of the key bonuses to our mineralogy mix is actually the praseodymium and neodymium mix of rare earth, which comprises over 26% of our rare earth. These materials are the building blocks of permanent magnets. The permanent magnet market is one of the fastest-growing markets in the world, and these two rare earths represent a very significant portion – almost 80% – of our future revenue stream.

EQ: Arafura has an interesting shareholder base. Can you tell us more about it?

Arafura was listed on the Australian stock exchange in 2003 under the symbol ARU. Our largest investor is ECE Nolans Investment Company, a major Chinese state-owned enterprise, which owns 24.86% of our shares. That shareholder’s investment has been capped by the Australian Government through our foreign investment review policy.

The Chinese have been extremely helpful and useful supporters of us historically, and we’ve formed some very good strategic alliances with other parties associated with our major shareholder. We believe our Chinese partnerships can significantly fast-track our project going forward.

Other major shareholders include mainly retail investors. We’re also listed on the secondary Börse at Frankfurt, and we have a fairly strong representation – about a quarter of our share register is located off-shore in Europe, and the remainder is predominantly retail investors here in Australia at about 45%.

We currently have a market cap of around A$40 million, and cash on hand of around A$25 million, so we’re well-funded at the moment.

EQ: You mentioned the company’s strategic alliances that have helped Arafura. Can you highlight any particular ones as an example?

Lockyer: One of the biggest opportunities that we’ve had through the assistance of our Chinese shareholders and other partners is that we recently announced a consulting arrangement with a Shanghai Stock Exchange-listed Shenghe Resources. They are an existing rare earth miner, processor and exporter. They are providing us with assistance to optimize our process flow sheet and also offer us the opportunity to directly liaise with their customers to ensure our product specification will meet customer requirements.  More importantly, they are going to be able to provide us with operational expertise so that when we go to commission our plant, which we’re hoping to do in 2019, we will be able to minimize the operational and ramp-up risks that unfortunately have plagued non-Chinese rare earth producers.

EQ: The rare earth market, and the entire resource market in general, has been depressed the last several years. But rare earth itself is getting a lot of attention because of the new technologies out there are expected to drive demand.

Lockyer: Well, there’s certainly been a lot of talk and rumour in the marketplace from various commentators on how the markets are declining, but I would just caution readers that they need to take great care when researching rare earth markets and they should be prepared to question the source of their information. It is a real challenge to identify truly independent credible commentary. Rare earths are a very complex and fragmented market and I just caution investors that should they wish to make investments in the sector, they need to do their homework. Many of my colleagues in the rare earth industry, particularly here in Australia, are more than happy to talk about their companies and to provide investors with a picture of where they see things.

EQ: In terms of the various types of rare earths markets, you mentioned magnets earlier, as an example. Can you kind of give us an idea of what the opportunities are that, specifically your company is well positioned to capitalize on?

Lockyer: China currently dominates the market, producing well over 90% of the world’s supply. Having said that, it also consumes around 70% of that production, and would actually like to consume more. There’s been a lot of pressure on China recently to open up its rare earth supply to other users. But in all fairness to China, what they’ve been trying to do is keep Chinese resources for China’s development.

Nonetheless, we see this as a great opportunity for us to come in and become a long-term stable supplier of rare earth materials to meet the non-Chinese demand.. And as I said earlier, our resource is very likely to be much larger than we currently understand it, but we know we could be delivering product into the market for much longer than 20 years.

In terms of the key market that we’re targeting, it’s magnets.

EQ: The permanent magnet market is expected to grow to $23 billion by 2018, according to BCC Research. What specific rare earth mineral in the Nolans Project allows you to take advantage of that?

Lockyer: It’s predominantly the neodymium (Nd), but it also is associated with the praseodymium (Pr). Those two rare earths together form an ultra-strong magnet that are permanent, and they work extremely well under most temperatures and at high speeds. So that makes them extremely efficient and effective in electric motors. So we are quite lucky that our rare earth mix has over 26% of NdPr.

Our internal forecast for growth for magnets is around 10% year-on-year. There’s varying reports, but generally they’re between 8% and 13% annually. That would lead to the $23 billion figure in 2018 that you just mentioned.

The key use for these magnets is in the automotive sector, but there’s also a huge growing need for minute magnetic speakers in the future. When I was a kid, we used to have stereo speakers that were of significant size because they had a big ferrite magnet at the back of the speaker. Now, there’s a tiny rare earth magnet in each earpiece. The amazing strength of rare earth magnets has allowed us to miniaturize just about everything.

So, magnets are a very fast growing industry. Wherever there’s miniaturization of any product—mobile phones, notebook computers, tablets, TVs, or any form of electronics—it is a result of rare earth. And certainly, we see those markets expanding rapidly.

EQ: Essentially, rare earths are the raw materials that go into these new technologies.

Lockyer: That’s right. The other point I want to make is that there is very limited substitutability for many of these products. So if you don’t have the rare earth associated with that end product, then you just don’t have the product. It’s the key to our system, and that’s why we say that rare earths have a high deprival value. For example, the rare earth lanthanum goes into rechargeable batteries. Other rare earths are responsible for color in screens. So without rare earths, you don’t have the magnets, and your world becomes a dull grey!  There are just no substitutes because of the unique chemical and physical properties of rare earths.

EQ: So the Nolans Project puts Arafura in a strong position to supply these very functional resources to markets that are becoming increasingly integral to people’s everyday lives. Looking at the company’s management team, can you tell us a little bit about your background, as well as a few of your members?

Lockyer: I accepted the role of Managing Director late last year, but I’ve been with Arafura for nearly nine years now. When I joined Arafura as CFO, we were certainly a junior exploration company, but over that time, we’ve raised in excess of A$150 million to advance our feasibility studies on the Nolans Project. I’m an accountant by trade, but I’ve spent most of my working life in investment banking in Europe and in Australia, predominantly working in derivatives markets. I’ve been involved in a number of mining projects and institutes around the globe. I worked for a company called Normandy Mining here in Australia, which subsequently was bought by Newmont Mining (NEM).

Our CFO and Company Secretary is Peter Sherrington, who is also an accountant by trade. Peter has a range of business interests. He’s been a private consultant to and the operations manager for a number of Australian and international agricultural businesses.

Neil Graham is the General Manager of Operations, and his role at Arafura is to develop and finalize the Nolans flow sheet, and get that into operations. He is a chemical engineer by trade, and we employed Neil following his role as head of operations for the large chemical company Orica, which has the largest chemical plant operating in Australia. So he has extensive experience in operating complex chemical plants, which Nolans will ultimately become.

Richard Brescianini is our GM for business development, and he is a geophysicist by trade. Richard has had a long association with the minerals industry, both in the private sector, through BHP Billiton (BHP) and through working with the Northern Territory Government Geological Survey, where he was its director for a number of years. He has knowledge of mineral resources in the Northern Territory is quite extensive.

Lastly, Brian Fowler is our General Manager for Sustainability, and he’s in charge of all our environmental approvals process, as well as managing our Northern Territory office. He’s been a mine operator for a number of different companies, predominantly in the gold industry, and particularly in the Northern Territory.

EQ: In terms of the company’s roadmap for the next 12 to 18 months, what are some of the things that investors should look for to make sure you’re on track?

Lockyer: One of the biggest things we’re aiming to have before the end of the year is some significant improvements to our flow sheet as a result of a Chinese optimization program that we’re in the process of completing through various expert organizations in China. We believe that will present us with some significant additional CAPEX and OPEX savings at Nolans.

In August 2012, we published relatively detailed document that articulated the base case for the Nolans Project. That document had significant CAPEX and OPEX cost estimates associated with the project at that point in time. So we went back to the drawing board, and have done a lot of work simplifying the process flow sheet and reconfiguring the project to the point where we’ve now got our capital requirement down to about A$1.4 billion, which is considerably less than the base case.

We’ve also now got our operating costs down to about A$15 to A$16 per kilogram of rare earths produced, which is down from about A$20 a kilogram. That’s quite significant because we believe that at A$15 a kilogram, we’re at about the mid-point of the cost curve and makes us competitive with Chinese production.

So we’re currently working on updating all this information and expect to release that in a comprehensive report in the coming weeks. It should give the market significant insight into the status of our feasibility study and a good understanding of how we plan to implement Nolans from this point forward.

We’re also waiting on some important results of our recent groundwater investigations south of the Nolans site in the Northern Territory. The focus of that work was to secure a sustainable long-term water supply for the operation. We expect to inform the market on progress in the near future.

EQ: Do you have any closing comments or any final take-aways for our readers?

Lockyer: I just want to reiterate our association with the Chinese rare earths production company Shenghe. China supplies nearly all of the world’s rare earth market, and so it makes sense that non-Chinese companies can benefit from Chinese expertise and industrial experience. Most of the rare earth expertise outside of China probably finished with Molycorp (MCP) over a decade ago when they closed the Mountain Pass mine in California. So to get these projects up and running is both difficult and capital intensive.

We’re aiming to de-risk the Nolans Project as effectively as possible through access to Chinese expertise. We want to differentiate ourselves from others in forming these strategic alliances. We’re not committed to Chinese off take arrangements in any way, but we are tapping into Chinese rare earth expertise and contemporary operating experience to help us de-risk our project going forward.

To learn more about Arafura Resources, visit http://www.arafuraresources.com.au/

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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