A Rare Story just beginning

Rare earth elements have been in the news consistently due to their increasing importance in our day-to-day lives. Most of the global REE mining is in China, but due to the rising geopolitical risks, international suppliers are looking to other markets to source their rare earth.

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This will put companies like Arafura (ASX: ARU) in good standing because it will soon be producing and supplying materials directly to end users, most notably its recent deal with car giant Hyundai.

The Company is on the threshold of production of these valuable materials and on the verge of beginning mining to supply REEs to some of the most significant end users in the world, digging from Australia’s holding of the fifth biggest reserve and the fourth biggest producer of this vital group of critical minerals.

In the past two years, the impacts of COVID on global supply chains have led to much industry, government, and public discussion about the importance of robust supply chains.

In the case of critical minerals, this discussion has been further informed and heightened by geopolitical events which have demonstrated the risks associated with the future production of those products that are vital for developed nations to retain their technological advantages in areas ranging from renewable energy to defence.

REE uses range from smartphones to vehicles, aerospace to industrial processes such as petroleum and chemical production.

Demand continues to increase steadily, and with expectations, it will grow anywhere from 8 to 10 per cent each year until at least 2030 — at which point there will be a total demand of around $15 billion yearly.

This will put companies like Arafura (ASX: ARU) in good standing because it will soon be producing and supplying materials directly to end users, most notably its recent deal with car giant Hyundai.

Hyundai will consume one-third of the production, which is expected to be taken up by the rest being distributed through other partnerships. The fact that most of the supply is already under agreement means that the Company should see consistent cash flow into the future, making the stock attractive for investors.

The Company’s stock is up over 30 per cent for the year and remains buoyant compared to the broader market, with a market cap standing at AU$560 million.

Its geographically blessed Nolans project in Australia’s Northern Territory produces 56 million tonnes of material, averaging 2.6 per cent on highly sought-after rare earth varieties.

Management expects the electric vehicle industry to be the biggest driver of demand for its products. Electric vehicles are expected to grow by 60 to 70pc in 2022, up from 6 million sold in 2021.

Growth EVs will be around 30 to 40pc in 2023, providing plenty of opportunity for the Company to grow its revenue.

Wind energy industry is predicted to be another more extensive user growing by around 30pc over the next four years and then by another 13pc a year until 2030.

Green protocols will increasingly drive growth. With developed economy governments planning to spend record amounts to increase the total instead capacity by as much as 20-fold in places such as Europe to 300 gigawatts, rare earth will see increasing demand.

Australia is no exception, as the government significantly reduces the economy’s carbon intensity. Significant demand for EVs, solar panels, and technology such as medical equipment, for example, MRI machines, from Australian consumers bode well for Arafura.

Neodymium-praseodymium (NdPr) is a critical rare earth element, the rare primary earth produced and sold into a significant supply gap.

This canyon is not filled with expectations. It will reach 45 kilotonnes between now and 2030, creating another exciting opportunity for Arafura.

NdPr is versatile — used in everything from drivetrains, vehicles, wind turbines, consumer electronics, e-mobility, air conditioners, and robotics. It is an integral part of the global electronics supply chain, making it very important that the supply for the element remains reliable.

Additionally, China has seen its ability to supply NdPr decline by close 60pc, presenting a massive opportunity for Arafura, leading to close to $1 billion capital investment by the Company.

The payoff will be substantial, with the 38-year mine life producing 4440 tonnes per annum, and a total sale of US$460 million in revenue by2025, with an EBITDA of $250 million.

It expects its internal rate of return to come in at 18pc at a total of $1.4 billion nett present value post-tax.

Apart from its recent deal with Hyundai, Arafura’s fortunes have been consistent, signing a string of MOUs with OEMs, including manufacturers in Europe, Japan, the United States, and Korea.

It has also signed MOUs with the Hyundai Motor Company, JingCi Material Science, and TianHe Magnetics.

Arafura is expected to start mining soon, at which point revenue will increase substantially. Production will be ramped up to 4400 tonnes by 2025, and the current price per KG of NpDr stands at $136 per kg, meaning revenue would be around $600 million by 2025, if not significantly higher if the cost of the mineral increases.

Considering that alternative supply remains limited, the price could quickly increase by 10 to 15c per year over the next 2-3 years, which could send the price to $200 per KG, making the entire project quite lucrative for both shareholders and management.

The Company also remains relatively green compliant with expectations that it will reduce its emissions significantly and have a 100 pc PV supply by 2035.

Management expects it will play a role in the net zero emissions strategy and is increasingly looking to be at the centre of Australia’s plan for a greener economy.

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