Chinese technical know-how opens way for Arafura REE project
Australian rare earths hopeful Arafura Resources (ASX: ARU), for all the speed bumps it has hit in recent years, still has an economically sound project, according to analyst Tony Parry of Sydney-based Resource Capital Research. And the relationship with major shareholder (24.9%) East China Mineral and Exploration Bureau (ECE) is likely to result in even further cost savings, he said.
His client says that Arafura is taking decisive action to improve the project economics and project financing prospects for what he calls “its world scale Nolans Rare Earths project”. So far projected operating costs and capital requirements have been slashed and are likely to be reduced further with on-going Chinese technical input. “These initiatives have maintained sound project economics despite rare earths price uncertainty”, the RCR report adds. (RCR has a consultancy arrangement with Arafura, which it fully discloses, but Dr Parry has been providing informed commentary of the REE sector for some years.)
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In fact, Parry is surprisingly upbeat: he sees Nolans as the next major rare earth oxides project to achieve project financing and a decision to mine. This will come as something of a surprise to investors: at the time the report was finalised, ARU shares were at A8.1c, reflecting both the delays to the Nolans project and the general lack of interest in the rare earths sector among Australian traders. Its present market capitalisation of just A$36 million is further indication that the Australian rare earth sector badly needs a confidence shot in the arm. (And, as noted below, the market seems to have completely forgotten that there could be vaulable phosphate and uranium by-product.)
Parry reminds us, however, that in his view Nolans is underpinned by a world class REE project. Probable reserves of 24 million tonnes at 2.8% TREO equate to a 22-year mine life based on yearly output of 20,000 tonnes of rare earth oxides. “Few other rare earths hopefuls globally have been able to demonstrate such a high degree of resource confidence,” he writes.
Apart from its Chinese shareholder, which is described as “supportive and active” in its relationship with the Australian company, RCR says Arafura is continuing to develop strong relationships with major multinational companies (including Germany’s ThyssenKrupp); the report argues that establishing offtake agreements with major players is vital to unlocking project finance. While ECE is now providing expertise to Arafura in REE processing technology, Arafura has also signed a memorandum-of-understanding with Shenghe Resources, a US$1.4 billion market capitalisation Chinese rare earths producer. Shenghe has been allocated 4.5% of Chinese REE export quotas. It is also providing technical advice to the Australian company and,potentially, to customers for future offtake agreements. The company also has a memorandum of understanding with an unnamed Korean multinational.
For those who have not been following the Arafura story of late, the RCR report provides a useful thumbnail sketch: the Nolans project is 135km north-northwest of Alice Springs in Australia’s Northern Territory. It has a contained 670,000 tonnes of rare earth oxides, and contains also 3 million tonnes of phosphate and 4900 tonnes of uranium. Of the rare earths, Nolans has significance for production of neodymium and europium.
Parry sees rare earth prices as now being in a firming phase, after a three year rollercoaster ride. First there was the tenfold price increase beginning in late 2010, and then the crash back to earth by early 2012. But he rightly says that, while prices are stabilising, the extreme volatility has severely shaken market confidence in the rare earth sector and its leading contenders. This had pushed ARU to revisit the project “configuration” in order to slash operating costs and trim capital requirements. Parry believes the rare earth sector has reached the bottom of this cycle. He sees prices continuing to firm in 2014 due to ongoing consolidation in the Chinese rare earth industry and the elimination of illegal production in China.
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