Rare earths at the right time, right place and right price?
The Rare Earth world seems to be dividing into an Us and Them dichotomy. The Them is China with its long dominance of the space, the Us is the Western based companies who have found that they just cannot play in the same sandbox as the Chinese. For the Chinese there will always be the over-arching priority of “national interest” which will be the trumpcard that is worth more than anything else in the game. The realization of this has meant that the hardy band of survivors in the rare earth element (“REE”) space have been busily carving out niches, awaiting the turn in prices and plotting their return to greater levels of activity and hopefully development to the production phase.
Arafura Resources Ltd. (ASX: ARU) is an interesting example that we have not written on for some time. Initially it was courted by the Chinese and still has a powerful Chinese presence on its share register, but of late it has been refocusing on the potential of Korea as the market for its REE output. In this analysis we shall look at what it has and what it might be doing next.
The Nolans Bore rare earths-phosphate-uranium deposit was originally discovered in 1995 with the original goal being uranium. The property is located deep in the Northern Territory (in Australia) about 135 kilometres north-north-west of Alice Springs and ten kilometres over the Sturt Highway.
At Nolans Bore the most abundant REE-bearing minerals at site are fluorapatite and allanite. The deposit contains 56 million tonnes of Mineral Resources at an average grade of 2.6% rare earth oxides (REO) with, surprisingly, around 20% of mix being Neodymium. This is unique amongst deposits we have looked at. Over 50% of the M&I Mineral Resources have been converted to Ore Reserves. According to the company these Ore Reserves are sufficient to support mining and processing operations for 23 years.
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It is interesting to note that REE companies have gone full circle. Many started out in other minerals (many in uranium) and then downplayed these aspects and now they are proudly included (as in this case) these other elements in not only their resources but in their planning processes as by-product credits.
Capex – The Feet of Clay
Unfortunately for Arafura as one of the first companies into the space it originally marched to the beat of conventional wisdom that bigger was better, rather than heed the cry in the wilderness of Jack Lifton that “rightsizing” was the way to go. Time has moved on and some of those with truly gargantuan projects have paid the price in terms of shriveled market cap and a lingering death. The dilemma was made even more delectable for Arafura in that it had offtakers, so shrinking the project to something like a pilot plant on a cheap and cheerful basis is not the “try before you buy” approach that big offtakers want to hear.
The company engaged in an exercise of cutting its coat to suit its cloth. The original August 2012 base case capex was AU$1.9 bn which by March 2014 had been whittled back to AU$1.4bn to match the new realities of the financing market. These savings were achieved through material improvements in, and simplification of, the process configuration, and simplification of the supply chain.
It then found that this slashing was not enough and management tossed away the butter-knife and took a machete to the budget getting it down to the current USD680mn. However, currently the budget is still in the upper decile of the REE project Capex numbers that are in circulation.
The metrics on the project as it currently stands are:
The long misery period of the REE space has refocused companies’ managements on the potential of by-products to juice up the potential revenue streams from projects and indeed in some cases tip the projects from the “not doable” list into the realms of the possible. In Arafura’s case the obvious avenue to pursue was the phosphoric acid by-product stream. As can seen from the metrics above the potential output at 110,000 tpa is not to be lightly dismissed. The prime use of this acid is in the production of phosphate salts for fertilizers.
Back in mid-April the company confirmed that its Phosphate extraction circuit pilot plant wassuccessfully completed on schedule with planning underway for subsequent stages of pilot program.
The phosphate extraction pilot plant is the second stage of Arafura’s final piloting of the Nolans process flow sheet. The phosphate extraction piloting operation was conducted over a 10-day period during March at SGS Australia’s facilities in Perth. This period of operation included commissioning and operation under two different process conditions to evaluate their impact on performance across the circuit.
The pilot is expected to confirm previous bench scale test results, and samples collected throughout pilot operations would indicate this has been achieved. The program consumed around 400 kilograms of HPC and resulted in the production of NdPr-rich pre-leach residue (PLR) and REE recovery precipitate, merchant grade phosphoric acid and waste gypsum.
Arafura is now planning for Phase 3 of the Nolans Pilot Program: the bulk preparation of PLR by pre-leaching the balance of the HPC produced from the Phase 1 beneficiation pilot. This work is planned to be conducted during 2Q17.
The Korean Scenario
The one thing that has continually mystified us about the REE space has been the absence of discussion of the Korean (and Taiwanese) potential. The former have a massive automobile industry and will inevitably need to make the jump to EVs and HEVs to remain in the game against the Japanese (and Chinese) and yet (publicly) there seems to have been little in the way of courting or involvement.
It was interesting then to see that Arafura has been courting the Koreans and even has a plan to locate a JV Toll processing plant in a Free Economic Zone in South Korea with an estimated CAPEX of US$85m. The plant should employ around 70 people.
The plant would take 16,450 tpa of REE intermediate product from Australia to be refined to produce:
- 3,601 tpa NdPr oxide
- 3,315 tpa other rare earth products
Arafura has signed an MOU with The chemical group OCI to develop this plant with the deal including long-term supply of raw materials under a tolling agreement. Speculation suggested that it would be located in the vicinity of OCI’s Gunsan chemical plant, about 200km south of Seoul, near the Saemangeum Free Economic Zone.
A graphic of how the plant layout might look is shown below:
It is worth mentioning in passing the current shareholder makeup of the company. This can be seen below.
The Chinese component is primarily East China Mineral Exploration and Development Bureau (Arafura’s major shareholder which had 24.86% when we last wrote about the company but is now closer to 20%). It has been the strategic partner for Arafura since 2009
Arafura is not mistaken in going after the potential of the Korean buyers of Rare Earths. The processing plant that is being talked about meshes with our “Next Big Thing” of downstreaming and ticks the boxes of right time, right place and right price. As with so many others that we have highlighted who are pursuing this trend they are, in entering the midstream, essentially becoming their own customer for mine output.
The big challenge now is going to be raising the AUD$680mn required for the capex of the main project or somehow rejigging the project (along the lines that Northern Minerals, for instance, have done) into a phased operation or a more modular approach.
The important thing in recent years has been survival in the space and Arafura has passed that test. As we have noted before the trigger for a Rare Earth renaissance will be a firming of prices, more than a surge, and the first signs of an improvement are becoming evident. In pursuing the Korean “option” the company is not wrong. This is obviously fertile ground while adding a phosphoric acid to its circuit gives it by-product credits and a product line that is always in demand from the agricultural sector.