Arafura Rare Earths Limited

ASX:ARU

Arafura Rare Earths Limited

ASX:ARU
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$0.190 (+2.7%)
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Reports (2) My Report Forum Investors
Forum Topics ARU ARU My ARU Model

Pinned straw:
Parko5
Added 2 months ago

It has been a while since I have tried to value ARU. I have rebuilt my NPV model for ARU given the new information to date. 

 

Notes on my model:

-      I have used information from the Definitive Feasibility Study (DFS) (7 February 2019) and updated for recent events.

-      My model tries to broadly look at the cash flows for 23 years (mine life). It is quite a ‘coarse’ approach but the results are broadly in line with the results of the DFS which would have generated its results from a much more detailed model.

-      I’m not a tax specialist, so I have tried to be conservative with the tax assumptions.

-      I’m unsure how much Phosphoric Acid is to be sold (ie revenue) and how much is retained to offset the opex costs. This is not clear in the DFS. But even if I am wrong, it is only a small amount in the total revenue <5%.

-      I have used a discount rate of 10%. I think this is quite conservative (especially given the Govt backing). But I have kept it at 10% which was also used in the DFS. 

-      For those of you running your own model, be very careful with currencies and units. Lots of data is provided in Chinese, USA and Aust. And different units like Kg, Tonnes etc.

-      It does not factor in the dilution that will happen in the final equity raise. 

 

 

Key points to note:

⁃      NdPr Pricing - The NdPr price obviously is key to the profitability of ARU and its corresponding Share Price. So to invest in ARU you need to take a view of the future of NdPr pricing. So I note the following on NdPr pricing:

o  ARU will have lowest opex cost to produce NdPr. So it will have higher margins but also importantly, if the China tensions disappear (unlikely) it can ride out the troughs of NdPr pricing. Also, there is only so long China can sell NdPr at a loss. Or if they do, it will make western countries nervous. They are backing themselves into a corner with this price suppression strategy. 

o  ARU has locked in NdPr Pricing in its offtake agreements that are well above current spot market pricing. This means ARU will be profitable in the short term. 

o  NdPr demand is growing (even with the recent media saying it is not). And there are just no other NdPr projects coming online soon at scale. This will give monopoly type pricing power for ARU for its remaining 15% of supply. And if we can ramp up production, just adds to the profitability.

o  The USA (and soon Euro) China tariffs will create large demand. These tariffs could be increased if Trump wins. This is a massive tailwind for NdPr pricing. I’m yet to estimate the impact of these policies. But I would expect it to be quite large. Again….this is NOT factored into my model’s assumptions. 

⁃      Additional Revenue - ARU should be able to process other companies’ deposits (Minhub?). This is another revenue stream not factored into the model. We have asked ARU to clarify what it can do in this respect. Also, ARU have stated they will seek approval for Phase 2 for Nolans with much more NdPr below 200m. Either of these events will warrant a rerate of the SP. 

⁃      Cost Overrun Risk - Much of the risk for a rare earth project is getting the processing plant working as designed. Lynas had massive issues in the early days. ARU has been on a 20-year journey. So there has been a lot of work done in this space. And the Cost Overrun Facilities provide a good-sized buffer should things not be quite right. So I think this risk has been managed quite well. But something to keep an eye on towards the end of construction and into the ramp up phase. 

⁃      Processing Cost Rebate - The 10% government Processing Cost Rebate is great. But if it is removed by the Liberal Party, it will not have a massive impact on ARU. 

 

The ARU Model:

Here is a screen shot of the inputs/outputs from my ARU model:

 ce08e434771820664baca1d06843b235b606f1.png

 

 

Conclusions:

-      The modelled cashflows show a SP around $1.00-1.50 is realistic.

-      NdPr pricing is likely to be strong given the current and prospective geopolitics and commitment of Governments to the energy transition. 

-      ARU has great potential for additional revenues (more NdPr onsite, additional processing of others, acquisitions).

-      Senior management’s incentives aligned with shareholders.

-      Strong environmental credentials.


Note - I will also post on Hotcopper.
Parko5
2 months ago

I was using the old DFS from 2019. There is an updated DFS from 2022.

So i re ran my model with DFS 2022 numbers, included a 2% CPI and modelled a 40% dilution from the Cap Raise.

98a7c39e4131e68369ca28ea2663768d60dd63.png


Interestingly...after all that....it does not change my valuation of about $1.25.


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Parko5
2 months ago

I will also put here how I did my dilution calc. But also i have been looking through the ASIC rules for cap raise. And I don't think retail will get to participate!!! Interested in people's thoughts on this.

So here are my thoughts on how to calc the dilution from the Cap Raise:

- The amount of equity required is probably $500 million. (I actually expect this to be less due to the money already spent to date).

- We have about 2 billion shares on issue.

- We would raise at around $0.30 to $0.40 (the Market Cap at that price (pre raise) is about $700 million).

- $500 million at say $0.37 is about 1.3 billion new shares.

- So new Market Cap post raise would be $500m + $700m = $1.2 billion

- There would be a total of 3.3 billion shares. So 1.3b / 3.3b = 40%)

- So that means about a 40% reduction in your shareholding (assuming you don't buy any new shares in the Cap Raise).

- So if you previously owned 1.0% of ARU, you would now own 0.6% of ARU.


So the key for existing holders to reduce dilution is:

- Raise the least amount as possible (not much they can change now)

- Raise it at the highest share price as possible.


Management are aligned with this.


So then we need to look at how the Cap Raise will be structured. My quick research shows that:

- Traditional / Standard Rights Issue - "the issue price is not more than the volume weighted average market price forsecurities in that class calculated over the last 5 days on which sales in the securities were recorded before theday on which the offer is announced". So we could not use this method if we want to raise at say $0.30 - 0.40. Someone is keeping the ARU SP surpressed.

- Accelerated Entitlement Offers - Same as above.

- Share Purchase Plan - Retail component Offer Price must be at a discount to the current SP. So unless ARU can bump the SP up to about $0.50...would be hard to raise above $0.30. ARU might do the instutional part at a higher Offer Price and limit the SPP to a small percentage of the total capital raise and do it at the lower Offer Price. Not even sure if this is possible. And would take alot of work in the background. ie it is not a standard SPP.

- Placements - Typically only applies to institutions...and can raise at any Share Price. Retail miss out.

If ARU cannot push the SP above $0.50 (with the upcoming offtake and debt announcments), there is little incentive to ARU for retail to be a part of the Cap Raise. ARU would likely do a Placement at a higher Offer Price. Of course, once all this comes out, the SP will move quickly up to the Offer Price.

If you are wondering why the SP has not gone up lately, even with all the good recent news (Govt debt package, cost over run facility, Biden tarrifs, Aust Govt giving 10% rebate on opex costs, etc. etc.)...it is the institutions positioning themselves to get the largest chiunk of ARU they can. Using all their manipulation tricks.

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