Arafura funding puts NT rare earths play closer to go-ahead

With fresh cash now firmly parked in the bank after a $20 million capital raise at 16c per share, the Gina Rinehart-backed Arafura Rare Earths now says it has sufficient working capital to carry it through to the equity financing phase for its Nolans rare earth project in the Northern Territory.

And to bolster that financial momentum, the company recently also confirmed it has conditional approval for US$775m in debt plus a further US$200m in a standby facility and another US$80m sitting in a “cost overrun facility” if required. Remarkably, most of the debt will come from sources like Government backed export credit agencies around the world and Australia’s Northern Australia’s Infrastructure Facility – all of which tend to provide debt on favourable terms given their links to Government.

Total capital expenditure for Nolans is expected to clock in at US$1.226 billion and the company says it also wants to tuck away a further US$66m in working capital to support the project and another US$168m in financing costs which would include fees associated with any equity raised, in addition to interest and establishment fees. Management is looking to raise a total of US$793m in equity to add to its debt commitments, US$80m of which will be used as a “cost overrun facility”.

The company is hoping to get to a final investment decision by the end of this year and at US$793m, its proposed equity raise would be one of the biggest capital raises for an ASX-listed company in 2024, underlining the sheer scale of the Nolans project. The quantum of the eye-watering US$793m equity component, when completed, is likely to be more than three times the company’s current market capitalisation of AU$365 million and would represent just shy of half the base funding required to make the project happen.

Rinehart’s Hancock Prospecting, Arafura’s biggest shareholder with a 10 per cent slice, could reasonably be expected to chip in on the final capital push given its taste for other critical metals projects such as the western world’s biggest rare earths player, Lynas Rare Earths.

Despite the price weakness in the past 18 months of the Chinese-dominated market for neodymium-praseodymium (NdPr) oxide, Arafura’s primary metal suite, the company’s plans still appear to be attracting substantial attention.

Rinehart’s strong backing has in part been an influence on investors, who view the canny businesswoman’s eye for profitable projects as a good guideline for themselves.

Securing conditional approval for more than US$1 billion of debt funding and completion support is an incredible result and one that reinforces the value of Nolans in diversifying a global NdPr supply chain. The Australian Government has led the way in debt funding through EFA and NAIF, which unlocked international support from export credit agencies in Korea, Canada and Germany.

Cuzzubbo says the company is now focused on making a final investment decision (FID) on the Nolans project that sits 135km north of Alice Springs.

As part of the debt funding conditions, Arafura must complete offtake agreements with counterparties to cover a required minimum 80 per cent of nameplate production, which is expected to eventually reach 4400 tonnes per annum. Once the offtakes are in place and the debt is secured, the company can then embark on the final capital raising.

The completion of the equity component of the financing will then fire the starting gun for the financial investment decision that is expected sometime before the end of the year.

Notably, a preliminary study by Arafura on phase two of the Nolans project has shown the potential for increasing production capacity by up to 150 per cent. That would support the growing global demand for rare earths, especially as the world moves toward decarbonisation.

It could also turn Nolans into a major hub for rare earths processing in Australia.

While Arafura seems to be making headlines for all the right reasons, others have hit rockier ground in recent times.

First, Lynas reported a drop in quarterly revenue in June due to falling rare earths prices. However it was perhaps Iluka Resources which voiced the loudest concern for the current market prices, with chief executive officer Tom O’Leary blaming Chinese market manipulation for the delay in its negotiations with the Australian Government to bail them out of a $600 million cost overrun at its Eneabba rare earths refinery in Western Australia.

Rare earths projects can be difficult to finance and get into production and with 85 per cent of rare earths production in Chinese hands, it is not uncommon for highly-volatile price conditions to dictate the fortunes of hopeful producers.

However, in Arafura’s case, the debt funders and investors appear to be looking past the current weakness and are giving the green light to what could become a seriously important source of critical metals outside of China.

Is your ASX-listed company doing something interesting? Contact: matt.birney@wanews.com.au