Arafura on hunt for fresh capital

Ross Kelly
The Australian - Business


RARE earths explorer Arafura Resources is canvassing institutional investors for fresh equity as it looks to accelerate development of a $2 billion project that will produce and export raw materials used in iPhones and hybrid cars.

Arafura wants to raise around $50 million to complete a feasibility study into the development of its Nolans rare-earths prospect near Alice Springs in the Northern Territory, as well as provide a cushion on its balance sheet, chief executive Chris Tonkin told Dow Jones Newswiresin an interview.

Arafura is among companies including Molycorp of the US and Australia's Lynas Corp attempting to break China's strangehold on rare earth's production, and meet global demand for elements like lanthanum and cerium.

However, smaller explorers face a challenge to secure funds after rare earths prices fell sharply on concerns the market will be flooded with new supplies from larger, more advanced projects currently under construction.


Mr Tonkin said the company isn't seeking a cornerstone investor and has rebuffed offers from several parties "wanting to put a lot of money into the company", preferring smaller investments from managed funds and hedge funds instead.

"At our current share price, we're not all that keen to hand the company over to one party for what would be a very cheap price," he said.

Arafura shares are trading at 17c each to give the company a market value of $67.3 million - well below highs of around $1.70 touched two years ago.

To help pay for the feasibility study, state-owned East China Minerals Exploration & Development Bureau -Arafura's largest shareholder - has agreed to provide around $10 million through a share placement that will boost its interest in the company to 25 per cent.

Arafura already has around $15 million cash and has applied to the government for an offset to its tax bill worth at least $10 million.

"We may already have $30 million to $40 million but we would still want to raise around the $50 million level just to make sure," Mr Tonkin said. "It's unclear at the moment whether we can get people to put their hands in their pockets to come up with something, but we're reasonably confident."

Prices of some rare-earth elements, like lanthanum used in energy-saving lights or cerium, are down around 80 per cent since last year.

However, Arafura says its project is unique because it's rich in higher-value neodymium, used in magnates found in hybrid cars and smartphones. Neodymium in the second quarter fetched $122.14 a kilogram, still well down on $234.40 in 2011 but up on $49.50 in 2010.

While Arufura expects prices for lanthanum and cerium to continue coming under pressure, it anticipates Neodymium prices to move steadily higher.

Arafura's forecast of a 30 per cent return rate from its Nolans project is based on an assumption that the price of its rare earths product range starts at $60 a kilogram in 2012 and grows at a real rate of 1.4 per cent a year to 2025. Higher-value neodymium is expected to generate 50 per cent to 60 per cent of total revenue.

The company intends to process its resource for export at Whyalla in South Australia, a move it says avoids the "country risk" of building a materials processing plant offshore.

More articles in this section ...