Arafura Resources Limited (ASX:ARU) recently updated the ore reserves for its 100% owned Nolans Neodymium-Praseodymium (NdPr) Project in the Northern Territory.
The ore reserves have increased by 54% to 29.5 million tonnes at 2.9% total rare earth oxides (TREO), 13% phosphorus pentoxide and 26.4% NdPr enrichment.
Importantly, the increase now supports 33 years of production – an increase of 10 years on the definitive feasibility study base case.
Hartleys has maintained its speculative buy recommendation for Arafura with a 12-month price target of 10 cents.
Following is an extract from Hartleys’ research report:
Increases mine life, lowers operating costs
Arafura Resources Ltd (ARU) has released an updated mining inventory. Formal reserves have also increased, but in this note we are concentrating on the inventory, unless otherwise stated. The new mining inventory increases mine life to 39 years and is based on lower operating costs. Costs have been lowered by revised mine scheduling because metallurgical testing has shown that further ore types (5A1 and 5A2) can be processed (previously only some 5A1 and no 5A2). The revised study also assumes an increase in ore milling and beneficiation capacity to 1.2Mtpa, from 1.0Mtpa, from year 14 of production with a further increase to 1.5Mtpa from year 23 and concentrate processing has increased from 0.30Mtpa to 0.33Mtpa. The overall impact of these changes was an increase in the pre-production capital cost of approximately A$20m.
Large volumes of NdPr oxide
Nolans will produce NdPr oxide. Volumes are large at ~4ktpa of NdPr oxide (around 8-10% of the current market). Eventual growth in the NdPr market is expected to be strong based mainly on the outlook for electric vehicles. In addition, there is strategic value of rare earths, and ARU’s location in Australia should be a premium for reliable supply. Note, ARU’s current NdPr offtakes are all with large Chinese magnet manufacturers. The project is also expected to produce phosphoric acid and low value cerium product which, combined, are ~20% of revenue.
Speculative Buy recommendation
Using current NdPr prices, we estimate that Nolans is still uneconomic. We believe prices need to increase to incentivise the supply to meet medium term (2025-2030) demand forecasts. A key catalyst (outside of general equity market improvement) for ARU will be when and if the Company can demonstrate binding offtakes for the NdPr. This is a risk given it requires multiple counterparties. Market and funding risk in the current environment is extreme, and hence caution is warranted in the short term. We have a Speculative Buy recommendation.