Arafura Resources Limited Update, Jun Q 2010

Resource Capital Research
ARU.AU
Arafura Resources Limited
A$ 0.46
A Bankable Feasibility Study of the globally significant Nolans Rare EarthsPhosphate-Uranium Project (NT) is now in full swing. The current focus is on
finalising and de-risking the mine design and chemical process. The project is still on
track for first production in 2013.
5 July 2010
Rare Earth Elements, Phosphorus, Uranium, Gold
Australia
Bankable Feasibility Study
Exchanges: ASX:ARU
Capital Profile
Production and Financial Forecasts
Share price (A$)
52 week range (A$/share)
Number of shares (m)
Options and warrants (m)
Convertible notes (m)
Fully diluted (m)
Market capitalisation (undiluted) (A$m)
Debt (A$m) - Jun 10F
Enterprise value (A$m)
Major shareholders: ANZ Nominees (30.2%)
0.46
0.38
290.6
15.0
0.0
305.6
132.2
0.0
132.3
to
1.29
East China Min Expl & Devel Bureau (ECE, 22.4%)
Avg monthly volume (m)
Cash (A$m) - Jun 10F
Price/Cash (x)
Price/Book (x)
Listed company options:
15
15.4
8.6
2.1
No
YEAR END: June
Mar-10a
Exploration and evaluation (A$m)
Corporate (A$m)
Exploration/(Expl.+ Corporate) (%)
Funding duration at current burn (years)
Shares on issue (pr end) (m shares)
Drilling - RAB (m)
Drilling - Other/Diamond (m)
Land holding ('000 ha)*
Tenement costs ($k per year)
Capital raisings (A$m)
Funding from JV partners (A$m)
Cash (A$m)
Cash backing (Ac/share)
Net asset backing (Ac/share)
2.72
1.50
64
na
290.6
0
0
0
19.48
0.0
27.1
9.3
22.4
Jun-10F
2009a
2010F
2011F
8.25
1.75
83
na
290.6
0
15,000
0
0.38
0.0
15.4
5.3
22.0
10.92
5.12
68
0.7
173.7
0
0
0
19.08
0.0
11.1
6.4
20.1
18.68
7.05
73
0.6
274.9
0
15,000
0
34.30
0.0
15.4
5.6
23.3
10.00
7.00
59
0.0
291.0
0
25,000
0
1.96
0.0
0.8
0.3
20.4
Quarters refer to calendar year.
Investment Points
Company Comment
World-class rare earth element (REE) deposit at Nolans Project,
with total resources of 30.3mt and production expected in 2013.
ARU's project valuation of A$495m after tax and capital payback
(20 year Phase 1 mine life, 10% discount rate).
Good access to infrastructure (railway, gas, highway).
Mine life of +20 years with annual production of 20kt rare earth
oxides (REO), plus phosphoric acid, uranium and gypsum.
REO blend has high proportions of valuable REE, e.g.
neodymium (21.2%), europium (0.4%). Blend value was
US$16.29 for 2Q10, 45% above 4Q09 average.
Nolans resource expansion and upgrade drilling is planned for
2010.
Project risk decreasing: chemical plant site selection, mining
reserves, mine site EIS and BFS final technology demonstration
all expected in 2H10.
Raised A$19.5m in 1Q10 via placement, rights issue.
ARU - Arafura Resources Limited
140
Share Price ($/Share)
120
100
Introduction: Arafura Resources listed on the ASX in 2003 ( ASX:ARU). Its flagship is the Nolans Rare Earths-PhosphateUranium Project (NT), 135km NNW of Alice Springs. The deposit has a JORC qualifying resource of 30.3mt containing 848kt of
rare earth oxides (REO), 3.9mt of phosphate (P2O5), and 13 .3mlbs of uranium (U3O8). The project has a Pre-Feasibility Study
(PFS), completed in 2007. A Ba nkable Feasibility Study (BFS) is in progress. Mining is planned for 2013, when the Nolans
2
Project could supply ~10% of the global rare earths market. ARU also holds +5,000km of grassroots to advanced exploration
+projects (REE, Au, Fe, Ni) in the NT.
Nolans Project: Planned annual production from Nolans is 20kt REO, 80kt P2O5 (as phosphoric acid), 0.5mt CaSO4 (gypsum)
and 0.33mlbs U3O8, with 400kt CaCl2 as residue that could be recycled into the chemical process. Mining rate, by open cut, will
be 1mtpa with mine life +20 years. Processing will be in three broad stages: concentration; acid leaching for separation into
RE/uranium and phosphate streams; and downstream production of final commodities. Key inputs are chloralkali and sulphuric
acid. Forecast capital costs are US$420m (Oct ’07 Pre Feasibility Study and Oct ’09 update). Opex could be US$150mpa, or
US$150/t ore at 1mtpa. The p roject area is well served by infrastructure, being close to a railway and gas pipeline. Road
distance to rail is 90km; rail distance to Darwin is 1200km. On-site concentrate production would precede transport to a chemical
plant, a decision on the site for which is expected in 2H10.
Valuation: Based on a value for the Nolans REO blend of US$10/kg, with U3O8 at US$50/lb and phosphate at US$750/t,
revenue is e xpected to be US$276.5m/yr. At opex US$150/t, and with a 30% pre-BFS discount, Nolans NPV is A$231m (10%
DR, AU/US 0.8) or A$0.75/share (fully diluted). NAV is highly sensitive to REO prices. The value of Nolans Blend REO at 2Q10
average prices is US$16.29/kg, which takes NPV to A$2.19/share; even allowing for dilution, raising 50% of US$420m in equity
at a nominal A$0.75/share, NPV at these REO prices is A$1.02/share.
Corporate: ARU has a major foreign investor, the East China Mineral Exploration and Development Bureau (ECE), which paid
A$22.94m for a 2 4.9% equity position in ARU (current 22.2%). In 1Q10, A$17.5m was raised at A$0.62/share from institutional
and sophisticated investors. A 1:10 rights issue at the same mark raised A$2m.
Development schedule: ARU’s focus is on completing the Nolans Bankable Feasibility Study in 4Q10. Expected
announcements in 2H10 is a Mine Optimisation Study including mining reserves, and design and engineering studies of the
Nolans beneficiation plant (Lycopodium, ASX:LYL). Detailed groundwater studies commenced in 2Q10 ahead of an
Environmental Impact Statement (EIS) for the mine site. De-risking of the chemical process is at an advanced stage, with work
progressing under contract on the RE/REO stream (ANSTO, Bateman) and acid recycling from the calcium chloride stream back
into chemical separation (Aker Solutions). Piloting and demonstration plants for final process testing have commenced. ARU is
on schedule, subject to financing, for mine and chemical plant construction in 2012, and production in 2013.
Investment Comment: As we stated in t he past quarter, 2010 will be a c ritical year for ARU. The potential value of its REO
blend has continued to grow strongly and the Nolans Project is on schedule, yet the share price remains below Nolans’ NPV at
current REO values. This valuation gap can be bridged by investor confidence as ARU reaches its 2010 project milestones,
which should address and finalise all the mining, industrial and environmental aspects of the Nolans Project. Other value drivers
could include a resource upgrade at Nolans after drilling in 2010, and in the medium term, project financing and offtake
agreements. Nolans is one of only a few globally significant REE projects that could come online in the current decade. Above all
else, the force driving Nolans to production should be increasing rare earths demand (7%-9%pa) over the next 5 years, against a
background of supply constraint by China, the major (+95%) REE producer.
Reserves and Resources/Mineralised Material
80
Code for reporting mineral resources - Australian:
Rare Earth Elements
60
(JORC)
Classification
Project
Equity
Ore
Mt
REO
%
c/off
REE %
40
20
Jun-10
Apr-10
May-10
Jan-10
Feb-10
Dec-09
Oct-09
Nov-09
Sep-09
Jul-09
Aug-09
0
Reserves
Resources
Nolans Project
"
"
Nolans Total
Mt Porter
Source: Bloomberg
Measured
Indicated
Inferred
100%
5.1
12.3
12.8
30.3
3.20
2.80
2.60
2.80
1.0
1.0
1.0
1.0
Indicated, inferred
100% (Au)
0.355
3 g/t Au
1.7 g/t Au
Mineralised Material (est., non compliant with JORC)
Contacts
Dr Steve Ward
Managing Director, CEO
Tel: +61 (0) 8 6210 7666
Perth, WA, Australia
www.arafuraresources.com.au
Analyst: Dr Trent Allen
[email protected]
Directors
Key Projects
I Laurance (Chairman)
S Ward (MD, CEO)
M Muir (Non Exec)
I Kowalick (Non Exec)
T Jackson (Non Exec)
L Shasha (Exec)
A Losada-Calderon
(Non Exec)
Project
Nolans
Aileron / Reynolds
Mt Porter / Frances Ck
Kurinelli
Hammer Hill
Jervois
Ownership/
Option
100%
100%
100%
100%
100%
100%
Metal
REE, P, U
REE, P, U
Au
Au
Ni,Cu
Fe, V
REO
kt
U
mlb
P2O5
0.0
0.00
0.0
163
344
333
848
2.9
5.3
5.6
13.3
Target
Type
Vein
Various
M'morphic
Reef
Sulphide
M'morphic
Process
Route
Leach
na
na
na
na
na
0.7
1.6
1.7
3.9
34.2koz Au
0.0
JV
Partner
none
none
none
none
none
none
mt
0.0
Project
Status
Feasibility
Early Expl.
Adv Expl.
Early Expl.
Mid Expl.
Mid. Expl.
0.0
Location
Aust (NT)
Aust (NT)
Aust (NT)
Aust (NT)
Aust (NT)
Aust (NT)
A free, in-depth report about Arafura Resources Ltd, dated 18 December 2009, is available from www.rcresearch.com.au
July 2010
©
Disclaimer and disclosure attached. Copyright 2010 by Resource Capital Research Pty Ltd. All rights reserved.
1
Resource Capital Research
Nolans Project simplified process flow sheet: work at the moment is focused on finalising
the rare earth stream and recycling acid from the phosphate stream back into initial
chemical separation. These studies will form part of the BFS.
Nolans Project valuation: economics are sensitive to the REO price, with US$10/kg shown
in blue. The current value (average 2Q10) is US$16.29/kg, for A$2.19/share.
NOLANS PROJECT (NPV based on current resource, October 2007 PFS and August 2009 BFS update)
Equity
LONG TERM PRICE FOR NOLANS' REO BLEND
:US$/kg
EXCHANGE RATE
:AUUS
NOLANS NPV @ 10% REAL*
NOLANS NPV @ 10% REAL*
NPV/SHARE (fully diluted)
:A$m
:US$m
:A$/share
Sensitivity
100%
100%
* Includes a pre-BFS project discount of 30% of the project valuation:
*Assumes constant long term prices for phosphoric acid, of US$750/t; and uranium, of US$50/t
5
10
15
20
25
0.80
0.80
0.80
0.80
0.80
25
21
0.08
231
185
0.75
580
464
1.90
953
762
3.12
1278
1023
4.18
REO
%
2.80
P2O5
%
12.900
U3O8
lb/t
0.44
848
3900
5.9
30%
NOLANS RARE EARTHS-PHOSPHATE-URANIUM PROJECT, KEY ASSUMPTIONS*
RESOURCE ESTIMATES
Current JORC Measured, Indicated and Inferred resource (1% REE cut-off)
Ore
Mt
30.3
Contained metal, kt
MINING METHOD
Open Pit
PROCESS METHOD
On site heavy media separation and flotation
Hydrochloric acid leach removing phosphate as liquid
From liquid: phosphoric acid, calcium chloride; from solid, production of REE, uranium
PRODUCTION RATE
:mtpa
:ktpa REO
:tpa P2O5
:mlbspa U30 8
:strip ratio
:US$
:%
:%
:$USm/yr
:%
:%
:Years
:
CAPITAL COSTS
RECOVERIES TO CONCENTRATE
DOWNSTREAM RECOVERY
OPERATING COSTS
TAX
ROYALTY
MINE LIFE
COMMISSION DATE
Year 1
0.5
10
50
0.17
1.0
420m
90
86
Year 20
1.0
20
80
0.33
1.0
(=13.3mlbs U3O8)
Production ramp up: 25-75% yr1, 75% yr 2; 100% yr3
Head grade and blend are same as resource grade
Sustaining capex 4%pa
Heavy media recovers 90% of apatite and REE minerals
For REO; 85% phosphoric acid; 80% U3O8
150
30
3
20+
1Q13
* These figures are preliminary in nature and are intended to provide only a general indication of project potential scale and economic robustness. Considerable
refinement may result from Bankable Feasibility study, expected in 4Q10.
July 2010
©
Disclaimer and disclosure attached. Copyright 2010 by Resource Capital Research Pty Ltd. All rights reserved.
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Resource Capital Research
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