A company that mines rare earths north of Alice Springs has signed an agreement with one of Australia's largest chemical companies.

Arafura Resources, which owns Nolan's project near Aileron, is teaming up with Incitec Pivot.

Incitec will build a chemical facility - in either NT or SA and it's now doing a feasibility study to see which site will be more suitable.

Managing director of Arafura Resources says there are big benefits to the agreement.

"The value to Arafura is very strategic. The proposal is that Incitec will look at the construction of what's called a chloralkali facility, plus a sulphuric acid plant.

"Chloralkali facility produces hydrochloric acid as well as caustic. Arafura would be the major recipient of hydrochloric acid for our processing technique to separate rare earths and phosphoric acid and the caustic would then become a by-product which would be marketed into the aluminium industry."

"So for us it has a number of issues. It obviously creates a security of supply for chemicals into our facility. It reduces a significant amount of transport costs and it eliminates any of the hazards associated with chemicals."

Mr Stephens says Incitec will be choosing where to build the facility.

"They'll look at a number of aspects including power and the accessibility of salt and sulphur...I imagine there'll be a location within the Darwin district and several sites within South Australia."

It is expected the feasibility study will take six months to complete.

In this report: Managing director of Arafura resources , Alistair Stephens