Consensus community valuation
https://wcsecure.weblink.com.au/pdf/ARU/02784883.pdf
Still digesting the details.
But great result.
The headline figure is a bit decieving. A large chunk of the money is for Cost Overrun Facility Gaurentees (ie if the bank has to increase it's cost overrun facility...then the Export Credit Agency (in this case the Export Finance Australia and Northern Australia Infrastructure Facility) with provide increased guarentees. But the other side of it, means that if there are cost over runs....we have money! So this has de-risked it somewhat. But the way it is presented is confusing. I think Govt wanted to make the largest number possible...so just threw all the numbers into the annoucement. But I still need to fully understand what it means.
This is a quick table i knocked up.
The key thing i'm trying to work out is the size of the major capital raise to happen in a few months time.
If my understanding of the Cost overrun facility is correct....then they need to raise about $640 million (aussie). Which is about what we were told a month ago.
Approx 110 million shares are short for ARU. Approx 5%.
With the Aust Govt funding news coming out, debt funding to be annouced shortly, off takes to be announced and equity.....there is alot of positive news coming. Will be interesting to see if the shorts decided to exit the ARU Rocket Ship in the next few days?
Fingers crossed.
The announcment is that ARU has got another US$75 million from the Korean Credit Export Agency (KEXIM).
With GE stalling on their offtake (due to their turbine division internal issues), ARU will be going to the other major players. ARU will def find another teir 1 off take player. This could change the funding mix. Ie if the other off take player is not german, then they may have to use their Export Credit Agency etc. This has def slowed their Financial Close. But I feel like they should be able to get there by March/April 2024 and with little dilution (ie only a small capital raise). I just hope they don't screw retail investors if they do go down the cap raise.
I have done some modelling of their business with a range of variables. But through all of the scenarios, I had always put in a larger capex (around $1.3 billion when they had about $1 billion in their Definitive Feasability Study.). The additional time lag has meant that inflation has absorbed some of that 'fat' i had put in. But I had also kept constant the operating costs of about $30/kg as opposed to their figure of $25/kg. Again i would assume some of that 'fat' will have been absorbed. I also assumed that it would take three years to be at a decent production (as opposed to their low 2 year figure). The NdPr prices have been steadily increasing again. But China is 100% manipulating the market prices. From the research I have done (and it's hard to get a definitive picture of how the Chinese operate their mines), the Chinese are selling at cost or a bit below cost. And that is at the current NdPr price of around US$60/kg. ARU's break even (at my inflated costs and timelines) will about US$55/kg and will be one of the cheapest rare earth producers AND do it with the best ESG credentials. With lots of companies now keen to spruik their ESG, I think this will make ARU's product highly sought after. And then there are the geopolitcal considerations that can only help ARU.
In summary the fundamentals of the project have not changed. GE stalling on their offtake obviously threw ARU's Financial Close off the timeline. I think we will hear some new off take announcment ealry next year (around mid Feb). And then hoepfully they can close this beast and start building!
I have looked back at how I could have invested in this stock better. And I feel that I entered about the right time except for two things that happened. The first was the chinese selling their stake in ARU on market. I has assumed that Gina or a big Insistution would have bought off market. So that constant selling gave the shorters and manipulators an opportunity. The second part i got wrong was that GE would fall away as an off taker. This has added 6 months to the timeline.
Anyway, good learning.
Parko
PS it is a bit of a ramble....but if anyone is interested, i can present more detail on any of the above or other issues regarding ARU or Energy Transition etc.
This is my first post on Strawman. So please let me know if I have not followed the right process or proforma etc. And please let me know your thoughts on any of the points below. This is just a quick summary of a longer report I wrote for myself a couple of months ago with more graphics from different sources etc.
Why invest in the rare earth mineral sector:
- Governments globally committing to energy transition.
- Hard to pick winners from the manufacture or operation of solar/wind/electric vehicles sectors. However, they all need minerals to be produced.
- All the minerals (Copper, Cobalt, Lithium, Aluminium, Graphite and Rare Earths) will see a large upshift in volume. However, due to substitution effects, many of the minerals will only see modest price increases.
- However, it is hard to substitute Rare Earths because the magnets produced by rare earths are the highest performing, most efficient for motors.
- There is also scarcity of rare earths because there has not been any investment in rare earths for 15 years due to China cornering the rare earth market (85-90%).
- Also it takes significant time for rare earth mines to begin production – typically 16 years from discovery to production.
- Due to geopolitical reasons/reshoring issues, the western world wants rare earths from safe western alliance countries.
Why ARU?
- ARU is the only major/material rare earth company about to begin production (3 years away).
- ARU will be mined and processed near Alice Springs.
- Low geopolitical risk
- Mined and processed with high ESG standards when compared to China. Many companies are looking for ethical mineral supply. This is likely to increase over time.
- Location is near Alice Springs which makes it easier to:
- Attract quality staff (ie close to town with schools etc.)
- Road/Rail infrastructure is close by reducing capex/opex
- Cornerstone investor – Gina Rinehart ($60m at a SP of $0.37 for 10% of ARU).
- Initial Offtakes almost complete:
- Financial Investment Decision due soon.
- Capital Raise completed with establishment works underway.
- Not likely to be another Capital Raise unless there are cost overruns (this would be known around mid 2025).
Valuing ARU - #valuation
ARU’s Definitive Feasibility Study (DFS) used the following assumptions:
- Capex of $1b including contingency
- Opex of US $25.94 /kg (this is considered very low for NdPr globally)
- Mine life of 23 years
- Discount rate of 10%
- NdPr priced at US $ 67 -90 /kg over the life of the mine
- Annual production of 4,357 tonnes
They get an NPV of A $729 million which would equate to a SP of about $0.30 - $0.40. Current SP is about $0.25. Breakeven would mean the NdPr price is around US $55 /kg.
However, if you look at the following NdPr prices and corresponding NPV/SP you can see how sensitive it is (note all approx.).
So we need to look at the long term pricing of NdPr.
Some factors at play:
- The geopolitical two-tier pricing of NdPr will likely mean ARU will get a premium for being ex China supply. Not in the short term because the companies signing up to the initial offtake agreements know they can source their NdPr from China. But in the long term ARU should be able to charge a premium.
- ARU will also get a premium for its strong ESG. Most of China’s supply are from African and Myanmar where health, safety and environmental concerns are largely ignored.
- Energy Transition rate of progress forecast means there is a massive supply gap of NdPr. Currently neodymium has global revenue of approx. $0.5 billion in 2022. And By 2030 this is expected to be $7 billion. This is a x15 increase in 7 years!!!
- Due to the historic lack of investment in rare earths, it will take at least 10 years for the market to bring new mines online into production.
So the current NdPr price of around US $80/kg could be considered low.
Since Strawman asks for a valuation, I believe that in the near term (ie next six month or when Financial Investment Decision/Finance is achieved) ARU should be valued at about $0.70 – 0.90. I think during construction the market will probably get bored…and then the SP could fade. Also there is the risk of cost overruns or delays. So that may also cause downward pressure on the SP. But once production begins and ARU is ramped up….I believe that a SP of around $1.20 is realistic. This would be around 2027.
Key risks
- Key risks are that China will push down rare earth prices. This has happened to the NdPr prices over the last 6 months (US $145 /kg to around US $70 /kg) and is most likely to happen again to try to dissuade investment in new rare earth projects. But geopolitics should create a two tier rare earth market. China/Russia and Western Alliance countries. Western Alliance country rare earths prices should go very high in the next 10 years until other western sources can be brought online.
- Another key risk is if governments decide to slow down the energy transition. This is unlikely, but even if they slow it down, rare earths will be in high demand.
- Substitution is also a risk, but the magnets produced by rare earths are the highest performing, most efficient for motors. There is a cost/benefit calculation when substituting rare earths for less effective alloys (like Elon Musk’s recent comments about Ferrite in their motors). But that price point should be quite high unless they can find a larger/lighter form of battery. Which would be 10-15 years away from commercial viability…if they discovered now.
Other considerations:
- The initial offtake agreements appear to be linked to the China supply prices. So we need to think about what China is likely to do. China is going to need to re-start their economy. And they are likely to invest in projects that decarbonise their industries. Thus the internal NdPr demand is likely to be high.
- China has also previously restricted supply of NdPr to Japan over a dispute. If this were to happen again, then ex China NdPr prices will rise massively.
- Other sources of revenue could also increase revenue such as processing other rare earths for other businesses (lots of Australian mineral sand companies could use this processing plant). There have already been some ARU announcements regarding this. This has not been included in the valuation analysis above.
- Mines have typical investment patterns. I forget the term for it. But right now we are in the down turn waiting for the FID/Financing. There is likely to be a jump in SP when that happens. Management have previously said FID/Finance was to be done by end of June 2023. That came and went. And the SP is getting punished. They have now said second half of 2023. Having worked on large deals with many different sources of funding, I can understand why it is taking a long time. Also they are dealing with Credit Export Agencies from respective countries. There is also another likely down turn before the plant is built and production begins. Especially if there are delays.
Conclusion:
- I think ARU has great potential in the near and long term.
- I think it is currently undervalued.
- I think in the next six months it will move up rapidly from the current $0.25 to around $0.70.
- In the next three years could downward trend before it begins production.
- Then once steady state production is achieved (about 4-5 years from now) it should start producing healthy dividends.
Cheers
Parko
Price sensitive:
The trend - should we invest?
A look at the resource:
Neodymium is the strongest permanent magnet material yet discovered. It is widely used in microphones, professional loudspeakers, headphones, computer hard disks, electric motors and generators. It is a rare-earth mineral mostly extracted in China, the United States, Brazil, India, Sri Lanka, and Australia.
Pending offtake agreement
So await an announcement. Could be after Easter next Tuesday
Georgia H Rhinehart, Hancock Prospecting...scoops up 8.37% voting power
'Bang' closed 52.5cps up 18%
MINERAL SANDS AND RARE EARTHS CONFERENCE 22 November 2022 Arafura Rare Earths Limited | ABN: 22 080 933 455 Level 6, 432 Murray St, Perth WA 6000 PO Box 5773, St Georges Terrace, Perth WA 6831 T: +61 8 6370 2800 | W: www.arultd.com | E: arafura@arultd.com Arafura Rare Earths Limited (ASX: ARU) (“Arafura” or the “Company”) is pleased to attach a copy of its presentation delivered by Managing Director, Gavin Lockyer, at the 23rd Annual Mineral Sands and Rare Earths Conference held in Perth on 22- 23 November 2022
Some slides below:
