Arafura Resources (ARU) has provided a comprehensive update on its Nolans project during the first quarterly earnings call of 2024. The company is progressing towards a final investment decision (FID) in the second half of the year for its NdPr oxide production project, which is poised to become the third global producer outside of China.
The project has secured significant government support and funding arrangements, including a USD 533 million Commonwealth support package and binding off-take agreements with major firms. Managing Director and CEO Darryl Cuzzubbo also emphasized the project's scalability and its role in diversifying the global supply chain for NdPr, which is critical for the electric vehicle industry.
Key Takeaways
- Arafura is on track to secure funding for the Nolans project, aiming to be the third NdPr oxide producer globally outside of China.
- The project has received strong government support and has secured USD 533 million in Commonwealth funding.
- Arafura has binding off-take agreements with Hyundai (OTC:HYMTF), Kia, and Siemens Gamesa Renewable Energy (OTC:GCTAY) for 2,000 tons and is negotiating additional agreements for 1,600 tons.
- The company expects to achieve FID in the second half of the year, with sustainability and job creation in the Northern Territory as key focuses.
- Phase 1 of the project aims for the best internal rate of return with affordable capital expenditure, while Phase 2 will be funded from Phase 1 cash flows.
Company Outlook
- Arafura is targeting FID in the second half of 2024, with a focus on securing the remaining milestones.
- The Nolans project is seen as a strategic opportunity to diversify the supply chain for NdPr oxide, vital for the electric vehicle industry.
- The company is in advanced credit approval stages with other Export Credit Agencies (ECAs) and commercial lenders.
Bearish Highlights
- The current low price of NdPr is acknowledged as a challenge requiring substantial investment.
- Arafura is working to avoid significant capital expenditure increases through advanced engineering and cost-reduction efforts.
Bullish Highlights
- Arafura has secured significant funding and off-take agreements, demonstrating confidence in the Nolans project.
- The project's large ore body and production of near battery-grade phosphoric acid as a byproduct contribute to its economic viability.
- The company has completed site work access, positioning it to move forward with main construction activities post-funding.
Misses
- There are no specific misses reported in the earnings call.
Q&A Highlights
- CEO Cuzzubbo confirmed that price pressures were accounted for in the November 2022 CapEx update and that the company is well-prepared for construction activities.
- CFO Peter Sherrington indicated that credit approvals are expected this quarter, with FID targeted in the latter half of the year.
- The company is open to strategic partnerships to cover the substantial equity piece of the project funding.
In conclusion, Arafura Resources is making significant strides towards commencing construction on its Nolans project, with a focus on securing the necessary funding and finalizing off-take agreements. The project's potential impact on the NdPr oxide market and the broader electric vehicle industry positions Arafura as a key player in the diversification of the global supply chain. With the completion of site work and the anticipation of FID in the coming months, the company is poised to enter the next phase of growth.
InvestingPro Insights
Arafura Resources (ARU) is navigating a critical juncture as it approaches the final investment decision for its Nolans project, with the aim of becoming a significant player in the NdPr oxide market. InvestingPro data and tips offer a deeper look into the company's financial health and market performance as it moves towards this milestone.
InvestingPro Data:
- Market Cap (Adjusted): 292.99M USD
- P/E Ratio (Adjusted) last twelve months as of Q2 2024: -3.13
- 3 Month Price Total Return as of Q2 2024: 33.33%
InvestingPro Tips:
- Arafura Resources has been adept at managing its balance sheet, holding more cash than debt, which is a positive sign for potential investors and partners as it seeks to finance the Nolans project.
- Despite the challenges outlined in the article, the company has shown a strong return over the last three months, which may reflect investor confidence in its strategic direction and the potential of the Nolans project.
Investors and stakeholders can find a total of 9 additional InvestingPro Tips for Arafura Resources, which provide a comprehensive analysis of the company's financials and market position. To gain further insights and make informed decisions, users can access these tips by visiting https://www.investing.com/pro/ARAFF and can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - Arafura Resources Nl (ARAFF) Q1 2024:
Mark Southey: Good morning and afternoon, everyone, and, thank you, Darcy. I'd like to welcome you to Arafura's First Quarterly Update for 2024. We have Managing Director and Chief Executive Officer, Darryl Cuzzubbo; and Chief Financial Officer, Peter Sherrington, with me on the panel here. Now we've got about 30 minutes set aside for this. So this year is shaping up to be a very significant and exciting year for Arafura as we progress further towards securing funding, which will enable us to achieve our aim of reaching final investment decision this year and then immediately mobilizing the site and commencing construction of the Nolans project. I'd also like to take this opportunity to welcome our new nonexecutive directors, Roger Higgins and Mike Spreadborough to the board. They both bring skills and expertise fully aligned to where we need to take the project. And on that, I will hand over to our newly appointed MD and Chief Executive Officer, Darryl. And he will take you through the highlights and results of the quarter and provide a general update of, Nolans and the market. Over to you, Darryl.
Darryl Cuzzubbo: Thank you, Mark, and good morning, everyone. It's great to be here with you today to share what progress we've made in the last quarter as well as talk about what we expect to achieve for the remainder of this year. Joining me to my right is Peter Sherrington, our CFO, and also in the room is Stuart Macnaughton, our recently appointed Chief Operating Officer. We also have Rob Gerrard; our Project Director, Shaan Beccarelli, our Head of Investor Relations and Corporate Affairs, as well as our company Secretary, Catherine Huynh. What we'd like to run through with you today is a recap on what differentiates Arafura as a attractive investment in the rare earth sector and more broadly the energy transition. We'll cover what we've achieved in the quarter as well as a detailed run through by Peter on our funding, and where we're up to, including what our equity, funding approach is. And we'll also touch on our schedule, what we've done to strengthen our board and management team, and some comments on our ESG approach. But firstly, let's recap on what differentiates Arafura and the Nolans project and why the timing is right now to progress Nolans into project execution. So I'll just jump to the first slide. So Nolans will be only the third NdPr oxide producer globally outside of China. Whilst there are other rare earth projects, they almost all don't produce in oxide and hence are dependent on processing capacity that today only exists in China. In other words, they cannot provide car and wind turbine manufacturers a non-China dependent supply chain, which is why we've had such strong interest in our offtake. Furthermore, we will be the only single site or to oxide plant in Australia, proudly keeping the value add and jobs in Australia. Hence, why we have enjoyed such strong government support by the way of long tenure loans. We also have a very large ore body that makes us scalable. The Nolans project as we have presented to you is only Phase 1. We have a 56 million tonnes resource, but it is open at depth at 400 meters. In other words, we don't know how deep the resource goes and how large the end the resource will end up being. To put this into perspective, Nolans phase one has a mine life of 38 years, but this only takes us to a depth of 200 meters when the resource is open at 400 meters. Consequently, we've initiated a scoping study to define what a Phase 2 looks like. Our intention is to pursue the approvals for Stage 2 while no one Stage 1 is being built with successful ramp up of Phase 1 provides the cash flow to fund Phase 2. As you know, Nolans is firm is fully permitted and ready to go. We are construction ready. With the completion of early works, we have the road access, the water access, and construction camp facilities in place and commissioned ready-to-start main construction activities as soon as we have secured funding. It's also important to note that a key byproduct for us is the production of 144,000 tons of near battery grade phosphoric acid. Not only is this of interest to potential offtake partners that have an interest in the manufacturer of batteries, as a byproduct, it significantly offsets our costs, putting our net unit cost below current producers at USD35 a ton, which is well below the current price despite the price being at multi year lows. I'll just jump on to the next slide. A key point that we have been eager to explain to investors is that NdPr pricing is elastic. That is, as we move into a structural and hence extended supply deficit, we should expect NdPr to demonstrate significant upside as we've seen in the recent past. We want to get ourselves into production to help address this supply deficit, but also to benefit from the structural supply, deficit. Let me explain a little bit more. So the biggest driver for future NdPr demand is electric vehicles. The graph on the right-hand side illustrates what some of the top global car manufacturers have been presenting to their shareholders by way of electric vehicle growth. The graph is in a logarithmic scale because the growth is predicted to be exponential as electric vehicles hit a tipping point. Now why wouldn't you buy an electric vehicle when they become cheaper than conventional vehicles as economies of scale kick in, when their ranges are longer than conventional vehicles, and when there is sufficient charging infrastructure in place? The problem, of course, is that you cannot manufacture a high performance electric vehicle unless you have NdPr. There is limited substitution risk unless you're prepared to have a heavier vehicle with less range that costs more. Now the reason why I say the NdPr price is elastic is because NdPr cost represents only 0.1% of electric vehicle price. So if you put yourself into electric vehicle car manufacturer shoes, if an electric vehicle magnet uses about 1 kilogram of NdPr, which at today's pricing costs about USD50. The average price electric vehicle today is USD53,000. So if you're an EV manufacturer, would you pay double the current price of a $100 or even quadruple the current price at $200 per car to get out an extra $53,000 electric vehicle out the door. And the answer is, of course, you would. The best analogy that we can make is can you remember the semiconductor chip crisis coming out of COVID where car manufacturers had to curtail the number of cars they were manufacturing because they couldn't get enough chips. The car manufacturers would have paid just about anything for those chips to get out to get another car out the door. Electric vehicles have an important role to play in the energy transition. And as in any transition, there will be winners and losers. And you can see that a key enabler for any car manufacturer to win in this transition is to have access to NdPr. We'll just move to the next slide. So this brings me to the point illustrated here that today 90% of NdPr is processed in China. What is not as widely known is that the Japanese have secured much of the remaining 10%, hence protecting their industries that now and in the future depend upon NdPr. What this means, though, is if you are a U.S., a Korean, or a European car and wind turbine manufacturer, you are dependent heavily on the supply from China who will inherently and naturally look after their growing domestic market first. Arafura represents the opportunity for other countries and related companies to do the same as what the Japanese so wisely did a decade ago with. If you look at the development cupboard for Arafura's projects that are likely to go into production in the next 5 to 10 years, the cupboard is pretty bare. And apart from ASM for ore to oxide, there is no one else. Consequently, Arafura has an important and timely role to play in diversifying the supply chain of NdPr at a time when, historically, it has never been needed more. Just moving to the next slide. The aim with this slide is to demonstrate the size and quality of the Nolans ore body and why it makes Orica rescalable. Our ore body is similar in size to the Linus mat weld and slightly small in terms of overall grade, knowing that Nolans is open at depth of 400 meters. And just the first 200 meters supports a mine life of 38 years. It is because of the Nolans potential due to its size that we've commenced a scoping study to define what is the natural next step of growth, i.e., Nolans Phase 2. Our aim is to pursue the approvals of this in parallel with building Phase 1 so that when Phase 1 is generating sufficient cash flow, we are ready to initiate the build of Phase 2. I look forward to updating you on this in the next few months. The Nolans ore body is also a inherently low cost ore body being open cut, but also, because of the host or type, we can produce a phosphoric acid, which with the byproduct credits, puts our unit cost at around $35 a ton, which is, a kilo, which is well lower than existing operations and well below the current multiyear, low pricing point. Let's move to the next slide, please. So let me now move on to what has been what has been achieved in the past quarter. The key highlights of the quarter have been securing USD533 million in Commonwealth funding support, which Peter will take you through shortly. This funding package is not only a significant achievement because of the size, of the total debt stack, but also significant due to the structure which lowers the risk for other lenders and investors alike. I like to thank the Commonwealth government for their support, and in particular, EFA and NAIF, and acknowledge the fantastic work that Peter and his team have done in securing this debt. We've been very pleased to announce the appointment of two new independent directors in Mike Spreadborough and Roger Higgins, as well as management appointments to the leadership team that makes sure that we're ready for the next phase of our development. The Nolans project remains shovel ready. So as soon as we have secured financing, we'll be announcing FID and releasing main construction contracts to get the project execution underway. I'll now hand over to Peter, our CFO, to talk you through in more detail of where we're up to from a financing perspective.
Peter Sherrington: So we'll move on to that next slide. Okay. So, thanks Darryl. So as Darryl's already discussed, we had the significant milestone in March of this year with the announcement of the Commonwealth Debt Facilities, totaling USD533 million EFA and NAIF. As you can see, the facilities that have been approved are, USD125 million from EFA, which was, under the national interest account and USD100 million from the Northern Australia infrastructure facility. Both of these facilities have a 15-year tenure, which is a significant tenant for a mining project. EFA also provided a standby liquidity facility of USD200 million to manage, potential increases in capital or ramp up costs. It's not our intention that we'd be using the SLF or the stand by liquidity facility, but it's important to equity holders, other lenders, and also off takers as it provides some completion support for the project. Importantly, that facility is also subordinated to the other debt facilities that are within the debt stack. In addition, EFA has also got approval to provide funding of USD75 million under the up to USD75 million under the commercial account in the ECA, in the export credit agency covered tranche. So it has the opportunity to sit alongside some of the commercial lenders in that covered tranche. You'll also see there that, NAIF has agreed to provide funding of up to USD33 million via an oversized contribution to the cost overrun facility. So we we're building into the funding lots of opportunities to manage any potential overrun. Whilst that's, something we're managing through our detailed engineering and the work that's going on, it's significant because it's been an issue with a number of projects that have been completed recently, and it provides comfort to lenders that there's the ability for completion support. As I mentioned before, it also has a flow and benefit for equity holders and off takers as well. Work's progressing on the credit approval with the other ECAs, and engagement is underway with a number of commercial lenders to participate under the covered tranche. Those activities are very advanced at the moment, and we hope to provide more news flow as those, work items are completed. Might move on to the next slide here. So in terms of offtake, I mean, our offtake and debt activities are very much linked. The offtakers provide us with the access to the export credit agencies. Our offtake position is we have 2,000 tons of NdPr oxide under binding off take agreements with Hyundai and Kia and also Siemens Gamesa Renewable Energy. In addition to the binding off take agreements, we have contracts under negotiation for roughly 1600 tonnes. These are contracts where commercial terms are largely agreed, and we're down to negotiating the key terms of the take or pay agreements. The take or pay agreements have already been reviewed by our lenders as being suitable for debt financing, and so it's a case of negotiating those terms to meet those debt financing requirements. Currently, we have, have a total of, 3,600 tonnes either under contract or under contract negotiation. That volume of offtake is sufficient for our project financing, And of the 1,600 tonnes that is under contract negotiations, roughly only 600 tonnes of that is required for the ECA funding for the link to those export credit agencies. It means that of the final 1,000 tonnes that we are negotiating, we are also pushing for other strategic benefits from the offtakers who are interested in that 1,000 tonnes and also in discussion with groups numerous groups around equity, and strategic equity to assist with the project funding. We have a number of groups outside the contract discussion group that are also interested in that 1,000 tonnes, so there is broader interest than we have product available under that, negotiation phase. We look forward to providing you with more detail on the offtake as we advance these activities. As we've always stated, we have a debt led funding strategy. That debt led funding strategy is performing extremely well. We're in advanced stages of credit approvals with a number of providers. We had the EFA and May facilities approved. And so our equity engagement has been building up in the background as we've been advancing those activities. During the period, we have engaged UBS and Canaccord as the joint lead managers for that equity raising. The equity strategy will leverage off the progress that's been achieved for the debt activities and will follow a cascade approach targeting significant support from customers and other strategic investors, to build a significant cornerstone group before we go to the market and launch a public equity raisin. With the NdPr price being low as a result of oversupply from within China and creating that low price environment, we need the participation of key strategics in the equity raising to demonstrate the strategic imperative of the NdPr supply chain to the manufacturing and the critical energy transition. So as we work through this process, we'll build that critical cornerstone, provide some leadership with the capital raising from some key groups, and build on that momentum for the rest of the capital raising as we're advancing the debt and the rest of the offtake arrangements.
Unidentified Company Representative: Let me talk a little bit about our schedule. We expect to achieve FID in the second half of this, calendar year. And aspirationally, we're pushing ourselves to, of course, achieve this early rather than later in the second half. With that said, I do want to point out that the timing isn't completely in our control and it's not even determined by the average speed of the different, counterparties that we're working with and is typically determined by the slower of the parties recognizing that the parties are naturally more concerned with making sure that their internal stakeholders are comfortable with the decision rather than making a fast decision. What we're doing though is we review progress on a weekly basis and make sure that we're giving all the support we can to the parties in particular that are driving our critical path. I also want to point out that we will prioritize probability of funding success over speed. So what I mean by that by way of example, if a large investor, who is a high profile that's likely to bring in support from other investors needs an extra one or two months for due diligence, then, of course, we will support them in that additional one to two months, of diligence because it'll make sure that we get there. My team and I can't get into project execution fast enough. If you look at the recent appointments, we joined because of our background and what we can bring for the next phase of the project. The timeline that you can see on this slide here shows the major activities from FID. Whilst the timing of some of the activities have changed since you've seen it last, and it'll continue to change. The timing from FID to first product remains the same at 37 months. Let's move to the next slide. Everything we are doing is focused on securing the necessary funding and being ready for the next phase of project execution and demonstrating to investors that we are ready for the next phase. As our chairman, Mark Southey, has already mentioned, he's refreshed the board, and we're very pleased to announce the appointment of the two new independent directors in Mike Spreadborough and Roger Higgins. Both of these independent directors bring substantial project and complex operational expertise across multiple organizations, which really helps sets us up to be ready for the forthcoming project execution and operational phases. We also announced new appointments to our leadership team of Stuart Macnaughton as COO. And, you know, I've had more than 30 years of experience in the resource sector, and I do not know of a person more capable than Stuart to get us through project execution and ramp up into stable operations. We've also had Shaan Beccarelli as head of investor and corporate, affairs join us, and we've promoted Tanya Perry as head of sustainability reporting directly into me, which better reflects the importance that we attribute to ESG and sustainability. We know that strong ESG is a threshold expectation for our community stakeholders, lenders, investors, but it also represents an important opportunity to further differentiate us from Chinese supplied rare earth oxides. We know that many electric vehicle customers want to be part of a responsible and sustainable energy transition, and it's important that we fit in with these principles so that EV manufacturers can demonstrate that their rare earths have been responsibly sourced. The diagram here demonstrates that sustainability has many components with ESG cutting across all of them. We have the opportunity to design this right from scratch given that we are a greenfield project. An example includes the design of the process plant and the power supply, which have been around maximizing energy efficiency and the increasing reliance on renewables over time. As you can imagine, our multiple international lenders demand highest standards, and we have and will continue to meet those standards. In visiting Nolans, some of our lenders have engaged directly with our indigenous stakeholders and have seen firsthand the strong and trusting relationship that has been built over many years. This is something that we don't and will never take for granted. An area where I know from experience where we can and will have a profound impact on the Northern Territory region is in creating jobs directly and indirectly in the region. As we build capability, not just at the Nolan site, but also with local businesses, we will help enable other projects to get up due to improved infrastructure and services. We will be the largest mining resource project by far in the Northern Territory with the longest mine life. Working together with the NT government, education institutions, and local leaders, we can and will have a profound multi-generational impact in Alice Springs and the NT more broadly, not to mention becoming Australia's first iconic water oxide mining and processing plant. So let me finish where I started. We have a great project and I think history will show that we will be bringing it on when our production is needed most. Upon securing the remaining financing, we are ready to go. We have a well-defined project with engineering levels beyond what you would typically see at FID stage, which has been a key reason why our CapEx forecast has been stable. We have native title agreements in place with very good relationships with our indigenous stakeholders. We have the necessary federal and territory government approvals. Our debt package is well progressed and tracking as we hoped it would. Our offtakes are well advanced with our focus on those that will bring strategic support through equity. The early works is complete, which means we can start main construction activities on multiple fronts, hence reducing project execution risk. And we're ramping up investor engagement as we secure the remaining debt. A lot has been achieved and we're very excited and energized about moving into the next phase of our growth as a company. And I look forward to updating you further as we achieve remaining milestones towards achieving FID. Thank you. I will now pause there and open up to questions.
Operator: [Operator Instructions] Your first question comes from Al Harvey from JP Morgan.
Al Harvey: Interested in your comments around the stage 2 expansion. I know it's very early stage, but just wondering if you can give us a sense of, what kind of scenarios are being looked at. Are there any options to, I guess, increase scale and bring forward some of that, mine life you've noted, the 38-year life to about 200 meters depth? Could you bring some of that forward with in terms of an increase in scope, or is it all about mine life?
Darryl Cuzzubbo: Yes. So let me, make some preliminary comments knowing that you can be more definitive once we've completed the scoping, say, in the next 2 to 3 months. So, in terms of Phase 1, it's about making sure we've got the best internal rate of return, making sure that the CapEx is affordable, et cetera. Phase 2 will be very similar to that. Building of the infrastructure that we already have in place. I'm going to say building of the knowledge that we have in building Phase 1. So phase 2 will, I'm going to say optimize I'm going to say optimize the same sorts of variables that we have optimized in phase, Phase 1. Very importantly, though, our intention is to be ready to bring on Phase 2 when Phase 1 is working, it's generating cash flow, and our intent at this point, with what we know today, is that it would be funded from cash flow out of Phase 1. We think that's a prudent approach. But what it also says to investors, if you want in on what will be one of the largest, NdPr producers in the world. If it all goes to plan, now is your time. If it all goes to plan, now is the only opportunity to be part of that. But I'll be able to say more, two to three months when we've completed the scoping study.
Al Harvey: Yes. Great. And, like, really looking forward to that. I guess, just building on that, I guess, with the scoping study in two to three months, are we likely to see, you know, economic parameters, particularly price assumptions similar to the Stage 1 study? And I guess following on from that, are we likely to get full updated economics on Phase 1 ahead of FYD?
Darryl Cuzzubbo: Yes. So just let me answer the first question. So, yes, so the assumptions for Phase 2 will be linked to this the source long-term forecast assumptions, that we would use in Phase 1. But we will update the market as we learn more, around the economic drivers. So as we find things that have changed, we will update the market.
Al Harvey: And just finally, just in terms of the equity piece, are you guys willing to put kind of a line in the sand on where you'd like to see the strategic partnering piece versus the split from the border equity markets or is it still up in the air?
Darryl Cuzzubbo: I think it's still to be resolved, but we do consider the equity piece to be substantial in terms of the total funding required. And probably, that that's always been our position. But as I mentioned with the current NdPr price being at a significant low compared to where it's tracked from, over the last couple of years, we sort of strengthened our resolve on that that cornerstone needing to be substantial.
Peter Sherrington: So we've got one question online. Mark has asked how are you avoiding CapEx jumps like other majors are facing?
Darryl Cuzzubbo: Yes. That's it. Mark, that's a very good question. So there's a few pieces to that. So firstly, we did a CapEx update in November 22, and that CapEx update was sub substantial and incorporated much of the price pressures that other, projects have seen since then. So we picked up both of the capital increase pressures in our November 22 update. We did update the market on our CapEx at the end of last year, and the CapEx went up a bit under 6%. And the reason why, the two other reasons it only went up 6% is because one, if you look at our project, the most complex part, the largest part is the hydromet plant and our engineering is over 60%. Why that is important is because it's our engineering is advanced to where we're no longer getting as surprises in terms of scope. So the scope is locked down. So that's not driving increased CapEx. We still are susceptible to, pricing pressures. However, Rob Gerrard, the Project Director and his team for over 18 months has been running a process of continually looking at ways to reduce CapEx, reduce project execution rates, reduce schedule. And we found that as we progress those ideas, they've been offsetting the CapEx pricing. So our CapEx has been stable for a few reasons. One, when we did the update in November 22, we picked up most of the pricing pressures. Two, our engineering is well progressed, so our scope is stable. And thirdly, we're continually, looking for at for ways to improve the project, which is offset pricing pressure increases.
Al Harvey: Another question asking when will site work site access works recommence?
Darryl Cuzzubbo: So, we've done everything we need to on-site to enable main construction works. And we put in 20 kilometers of road access, I think it's 26 kilometers of pipeline, construction camps, and it's all being commissioned. So once we've secured funding, we will announce FID and we will release contracts to start main construction activities. So to answer your question, as soon as we've secured funding, we'll be starting main construction activities.
Al Harvey: And the final question, just asking for an approximate schedule for debt to be finalized and fit to happen.
Darryl Cuzzubbo: Did you want to talk to that?
Peter Sherrington: So, we're working towards, our credit approvals on the balance of the facilities over the balance of this quarter. And we would look then to build the equity stake around that that debt funding announcement. And I think in our schedule in the presentation, we've indicated we're targeting a second half of this year for the funding.
Darryl Cuzzubbo: So there's no more questions? So look, let us wrap it up then. Again, just thank you for joining us on our quarterly update. We are truly at a very exciting juncture in Arafura's life. I want to recognize and appreciate the shareholders and your loyalty and support along this journey. I think the next 6 months are going to be very exciting for all of us, and we're certainly energized and ready for it. So thank you.
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