Arafura Rare Earths Limited (ARU) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Arafura Rare Earths Limited Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Darryl Cuzzubbo, Managing Director and CEO. Please go ahead.

Thanks, Darcy, and good morning, everyone. Thank you for joining us today. My name is Darryl Cuzzubbo. I'm the Managing Director of Arafura Rare Earths. And together with me today is Peter Sherrington, our Chief Financial Officer. I'm going to make some introductory comments and then hand over to Peter to take you through some of the specifics around the National Reconstruction Fund Commitment that we were able to announce today. Today marks an exciting milestone for Arafura, as we continue to successfully execute our funding strategy, taking us one significant step closer to a fully funded solution and hence, a final investment decision on the Nolans Project. As previously announced, we have been pursuing a debt-led funding strategy, where we progressively and successfully secured over USD 1 billion in debt, which was announced last July with Export Finance Australia and the Northern Australia Infrastructure Fund being the first and hence forming the cornerstones that enabled us to secure the remaining debt. With the full debt secured and leveraging off the associated due diligence, we've been progressing the remaining part of our funding strategy. Today, we can announce that the National Reconstruction Fund Corporation funding becomes the first binding cornerstone agreement in securing the remaining funding. This deal has been months in the making and derisked the equity funding required for the development of Nolans. This funding of AUD 200 million is substantial, both in terms of size, but also in how it demonstrates the level of support that the Nolans Project enjoys from the Australian government in building Australia's first rare earths ore-to-oxide refining facility, which will bring significant benefits and employment to Australia in the Northern Territory, whilst also elevating the role that Australia will play in the global energy transition. This funding meets our 3 key objectives and that it has been structured to be subordinated to existing debt; secondly, to minimize dilution to existing shareholders; and thirdly, encouraging investment from other cornerstone institution and retail investors. We're progressing well with the other cornerstone investors that will see us secure over 50% of the equity required before going to the broader market. As previously mentioned, we have much more interest in the remaining offtake available than we can satisfy, and we're using this to help pull in the cornerstone investors that want this offtake. I will now hand over to Peter, our Chief Financial Officer, to take you through the specifics before opening up to general Q&A. Over to you, Peter.

Thanks, Darryl. Look, today marks a significant milestone in our equity funding strategy that Darryl has talked about as we confirm the AUD 200 million investment in and commitment from the National Reconstruction Fund Corporation in support of developing the Nolans Project. Hopefully, you've seen the announcement and as outlined in the announcement, the NRFC investment will take place through the issue of unsecured convertible notes with a face value of AUD 200 million, so AUD 200 million. The convertible notes have a conversion period of 7 years with a non-core period of 2 years during the conversion period. So during this 7-year conversion period, interest on the coupon, interest or the coupon on the outstanding face value will accrue at the rate of calculated with reference to the 3-month bank bill swap yield or the BBSY reference index plus a 3% per annum margin. The coupon will be payable quarterly at Arafura's election by the issue of new shares or by capitalizing the coupon into the face value. So there will, in effect, be no interest payable by cash during that initial conversion period of 7 years. At the NRFC's election during the conversion period, the convertible notes can be converted into fully paid ordinary shares at a fixed conversion price. The fixed conversion price will be referenced to a 40% premium to the theoretical ex-rights price or the TERP of shares calculated with the reference point of the equity funding for the final development of the project. The equity financing is expected to be announced at or around the time that the company makes its final investment decision for Nolans. FID remains on track for the target of the first half of 2025, as we've previously released to the market, and we'll make further announcements regarding FID and its equity financing in due course, as we have more details that come to hand. If the convertible notes do not convert to ordinary equity during the conversion period during that initial 7-year period, after that 7-year period, the margin on the coupon will increase by 3%. So the rate will still be referenced to the BBSY index. But instead of a 3% margin, it will be a 6% margin on top of that BBSY. Effectively, the increase is in lieu of NRFC's right to ordinary dividends, which it's not entitled to as a convertible note holder. The maturity date for the convertible notes, if they are converted, will be 15 years from the date of issue of the convertible notes that that's subject to all other project finance being repaid. At maturity, the face value and any accrued interest will be redeemable in cash. The issue of convertible notes is subject to a number of conditions, including Arafura and NRFC finalizing and executing long-form docs and Arafura obtaining shareholder approvals and successfully completing the equity financing that's required in conjunction with the convertible notes to fund the development of the project. It's expected that the convertible notes will be issued at or around completion of the equity financing. And in effect, the CPs for the convertible notes are very similar to the types of things the directors will consider in making their final bid decision. Obviously, a summary of the key terms of the convertible notes is contained in Annexure A of the ASX announcement. There's quite a bit of detail there, and it's a useful reference point to consider in conjunction with the information I've just provided. Look, in closing, I'd just like to, on behalf of the team, thank the NRFC for their commitment and professionalism over the months that we have negotiated this agreement. And I'd also like to thank the Arafura team members for their diligence in working with the NRFC to complete the due diligence and negotiation of the convertible note terms. That's probably the quick summary in relation to the convertibles, which is a really important outcome for us and a significant milestone. But I'd now like to open the meeting up to take any questions that you may wish to put to us in relation to the announcement and the convertible note facilities with the NRFC. So we'll open it up to discussion and questions now, Darcy.

[Operator Instructions] Your first question comes from Al Harvey from JPMorgan.

Darryl and Peter, congrats on the additional funding. Just maybe to start with just a bit of a clarification. I think you guys had always been more recently targeting a debt equity split of around 50-50. So yes, just wanted to clarify if you're effectively thinking about the convertibles as an equity piece or more on the debt side and just how you think about potential, I suppose, conversion in time and where that would sit in the capital structure?

Thanks, Al. So look -- you're happy for me to answer this, Darryl?

Yes, by all means go for it, Peter.

Yes. So look, obviously, it's a hybrid or has a debt and equity component, but we consider the convertible part of that 50% equity component of the funding. So we have really see the debt component as locked down and really see this as part of a -- of the total equity funding that we require, we see this as 15% of that equity that we're chasing. So that's the first part to your question. And how do we see -- I think the second part was how do we see the conversion of these notes during the period? Was that the second part, Al?

Yes. Just that I suppose that, I guess, around that risk if they do decide to not convert or how do we think about that?

So look, the obviously, we see the mechanism conversion, which sees it at a 40% premium to the TERP on completion of the project financing. We see that as a positive from the equities perspective. There's deferred dilution and dilution at a higher point than what the project financing will be completed. We would probably see if there is during the period of that 7 years, there's removal of financing risk, removal of the commissioning risk. And hopefully, as we move through that development phase, we also see the uptick in demand for NdPr and better pricing outcomes. Under that scenario, we would probably see that there's high probability of conversion prior to the end of the 7-year conversion period. Obviously, if that does not happen, it remains as effectively a debt facility, but it's subordinated to the senior debt facilities and it's been structured so as it doesn't impinge on those rights of the senior debt holders. The other thing is we do have the ability to pay down the convertible after that conversion period. But effectively, the long-term nature of it of 15 years, we see as highly positive for the company. And we probably also see that the interest on the facility is payable from available funds after all debt facilities have been serviced, and we still see it as highly positive for the company.

Maybe just switching to an update around offtake and potential strategics. I mean, I suppose you had a good run getting a few offtakers locked in over the last 18 months or so. If we're thinking about potential ex-China premiums and those kind of things, what have been the sticking points in, I guess, locking in the rest of that offtake and strategic partners?

Yes. So it's a good question. And so, what we've really done is with the offtake that we have secured with Hyundai and with Siemens Gamesa, they effectively are critical to the debt funding. And the debt funding through the German and Korean ECAs is strongly linked to those offtake arrangements. The remaining offtake is not so important. It has some linkages back to the debt, but more in a sort of a commercial sense rather than an ECA sense. We are looking to try and lock in equity from some of those offtakers. And that's probably why we haven't announced any further offtake because we are now linking the 2, which makes it one more complex and probably means that those offtakes and strategic equity opportunities that we're pursuing are likely to come to completion, as we get closer to announcing the FID. So we are still working to complete those offtakes, but are linking that to equity, which probably means that those 2 activities are now linked together and it's less straightforward than those first 2 offtake agreements. You sort of also asked how are the offtakes working in relation to China premiums and et cetera. What I would say is that I think probably it is a much more challenging environment right at the moment. There's strong interest for the offtake, strong interest for the equity. But where commodity prices more generally, whether it be lithium or nickel or NdPr all being lower is probably creating some challenges and headwinds. But we probably see that very much as a temporary thing. We probably also see that some of the uncertainty we've had around the U.S. election and what policy will look like in the U.S. is probably going to create some opportunities, as we move forward, and we probably see those as a catalyst to rounding out our process.

If I might just tack one final one in. I suppose we've had Iluka confirm their expansion with the Eneabba project. I just wanted to get a sense of how you and the team are thinking about, I guess, staffing up the project, I guess, maybe there's limited expertise across the Australian market in rare earth, refining. I just maybe want to get a sense if you see any risks there through the commissioning and ramp-up -- build commissioning and ramp-up phase.

Do you want me to take that one, Peter?

I think it's probably best answered by you, Darryl, yes.

Yes. Sure. So there is definitely a risk around attracting, training people. But let me answer it this way. So if you look at our processes, if you break them down, they're well-proven processes and the expertise exists. So the challenge is how you integrate the whole thing. The market, the sort of skill set that we will be tapping into is the downstream processing, whether that's lithium, whether that's nickel, oil and gas and maybe more broadly manufacturing. So it's quite a large pool of people. So we do have a large pool, sure, Iluka will be tapping into the same pool. But we're talking in the order of 300 people. So it's not of the scale of an iron ore mine when you're looking at 1,000. So yes, it is a risk, but we think it's certainly manageable.

Your next question comes from Daniel Morgan from Barrenjoey.

A few questions. Firstly, lots of government funding and support from well, various governments. Just wondering, is there potential for more convertible notes like you've done today from perhaps Germany, Korea or others on the same terms? Or is there potential for grant money?

I'll let you answer that, Peter, if you like.

Yes. Okay. Thanks for the question. So yes, you're right. So there is a lot of strategic support from ECAs already in the debt structure. And I suppose the NRFC funding is the first of the state-backed equity type investments that we've been able to announce. We do have engagement with other similar state-backed equity investors. Look, I think our initial discussions are all -- will be around -- are around straight equity with these groups. I think the terms that we've achieved with NRFC, i.e., the 15-year term and subordination to all the other project financing facilities and fairly concessionary coupon in the first 7 years. I'm not sure if we'll be able to negotiate those same convertible terms with these other groups, and they may just defer to a straight equity position. But it's something that is ongoing with a number of other state-backed funds, which there is probably several of those, and there's ongoing engagement with them.

And in your discussions with potential strategics with some offtake and/or funding, which you've tied together. I presume that the announcement today provides a lot of impetus for those discussions or support to those discussions. Can you maybe just expand on that? Are the strategics aware of that this was a possibility and that it derisks the potential funding from that perspective?

So, yes, so what we are looking to do as we did with the debt facilities, the first debt facilities we announced were with EFA and NAIF. And the announcement is probably not the first time that the other lenders become aware that they're part of the funding solution, but the completion of those through to approval phase provided the momentum for the completion of the rest of the debt stack. And we're using the same approach here. We're continuing to try to find ways to build the equity stack. We leveraged the strategic nature of the NdPr. Under confidentiality, we are able to provide some limited information to some of the offtakers and strategics that we're engaging with on the development of the arrangements with NRFC and with others, and we were able to share that along the way. But certainly, the completion of this agreement and advanced [indiscernible] long-form docs will be an opportunity to build further momentum around that engagement with offtakers and strategic investors alike. So it's really about building the stack, building the momentum, and that has been the strategy the whole way through on the debt, and then we've rolled that same strategy, although slightly different into the equity process as well.

And on the offtake discussions, is there a role for the Australian government to play in the offtake discussions with regard to -- I know there's some people have thought or speculated that there might be potential for price floors or underwriting or things that the government might get involved in. Is there any role for the government to play in that? Or is this going to be a straight commercial negotiation that you're going to have?

Look, we would welcome that sort of support, but I think we're working it from the point of view that it all has to stack up commercially. And so, those types of mechanisms that you're talking about in terms of price floors or other [indiscernible] try to embed them in the underlying commercial agreement sits between Arafura and the offtaker. We're trying to replicate a commercial structure here rather than something that's probably sort of becomes artificial in some way. But we, of course, are open to government coming in and being involved in that way, whether it be Australian or other, but it's not the -- it's not Plan A for the completion of the offtakes.

And last question, just we are late in the federal election cycle, which there will be an election called this year. Can you just talk about what impact, if any, that could have on these arrangements if we go to caretaker mode? Or is this believed to be bipartisan, these arrangements? Can you just talk about that?

Yes. Let me take that one, Peter. So look, I think both sides of politics supports this sort of project. It's high paid, high school jobs in the Northern Territory, opens up a sector for Australia. We keep both sides informed. So I think we enjoy the support of both parties.

Your next question comes from Tom Prendiville from Canaccord Genuity.

Darryl and Pete, yes, congratulations again on the additional funding announced today. I guess, most of the project-related questions around offtake and funding have been asked. So maybe I'll just ask a more general question around the rare earths market. Obviously, you're having discussions with potential offtakers at the moment. And I think you sort of touched on this before, Peter, but I'm just curious as to what you're hearing in terms of REO demand as we move into 2025. Clearly, REO demand was soft in 2023, 2024, particularly in the autos and wind turbine segment and you combine that with higher Chinese supply has been a soft pricing environment over the last 12 to 24 months, which has made funding projects like yourselves quite challenging. So just interested in your views around pricing as we -- around NdPr pricing as we move into 2025.

Yes. I'll chip in to begin with, Tom, and then Darryl may want to add. I suppose we probably saw the weaker NdPr price is more driven by impacts from supply. We're of the view that pricing at the moment sits below the cost-price for a large number of China producers. But even notwithstanding that, supply appeared to grow either through mined or imported concentrates that were processed in China, which probably doesn't work with normal supply-demand dynamics. But that aside, slightly weaker demand through slightly lower EV and perhaps wind turbine, we've seen pretty solid uptake of EVs in China, but also in areas like Norway, Sweden and so on that have really high EV penetration into their market. But we probably see it as a -- we haven't got a straight line in the uptake of EVs specifically and then wind turbines. We probably see some catalysts that will probably create new demand opportunities along the way, whether they be new battery technologies, improvements in infrastructure, those types of things that will actually change the demand dynamic. Probably also, we saw probably the -- some of the European and U.S. automakers holding back on the execution of their EV strategies, and we probably still see that to some degree during the last quarter of last year. But with those makers now seeing that they've got some significant contribution from the Chinese makers, and they are now ramping up their strategies in order to better penetrate that market. So, I suppose we probably see that China probably doesn't have the ability to want to continue to supply forever to meet all of the world's requirements, particularly at a price that doesn't incentivize new production. So we probably see this as a short-term position and the doubling of NdPr demand through EV uptake, wind turbine uptake and then ultimately, in robotics, which we see as a really important sector that's probably flown under the radar in the NdPr space. We see those as the long-term drivers for NdPr moving forward and are quite confident in the impact on -- that will have on demand and also a change in probably where China sees supply sitting in terms of meeting its own procurement and what pricing might incentivize them to produce for non-China markets. So we've probably got a much stronger long-term view and probably see some of the catalysts in the EV sector emerging around new battery technologies that will change charge times and better infrastructure as well, which might create the catalyst for the next uptick in some of those demand profiles.

Look, just to maybe add a little bit to that, right? So I think we've got to just distinguish between the short-term dynamics and the medium-term dynamics. So short-term dynamics, China has been importing additional NdPr concentrate. And I'm going to say their production quotas that they set has matched or more than matched supply -- matched demand, sorry. If you look at the medium-term dynamics, as Peter already mentioned, expecting demand to double over the next decade, it's very difficult to see China meeting that demand. And they're obviously going to bias towards their own domestic production first. I think the second thing that we need to factor into all of this is the average price of electric vehicles sold today is USD 55,000. The cost of NdPr that enables that is $55. So you look at the EV sector and the wind turbine sector, they've got a lot at stake and they're less interested in the price of NdPr than they are in the security of supply of NdPr. So if you triple the price of NdPr, you're paying an extra $100, $110 per electric vehicle. So when you look at that and also if you look at the supply side of the equation, there's not many rare earths projects going all the way to an oxide that you would expect to see moving into production over the next decade. So you've got rising demand. You've got a lot at stake in terms of revenue from EV and wind turbine manufacturers for actually a small cost of NdPr and the supply covered is pretty bare. So you pull all that together, and you'd have to say that the medium-term dynamics is going to be very, very different to what we're seeing. One forecast assumes we believe that inducer price will be about 3x what we're seeing today. One of the other things that may trigger this change in dynamics is the U.S. introducing their tariffs around NdPr magnets in 2026. So anyway, again, Arafura, we're less interested in the pricing today. We're much more interested in the medium-term pricing as we move into production.

Good one, Darryl and Pete, I agree with most of your views there. Maybe just a quick one to finish off. Just maybe you can just remind us of the latest development time line for Nolans, what that looks like now? I mean, if we assume FID middle of this year, 2 years of construction, so first production is late 2027, early 2028. Is that about right? And then maybe just remind us of the expected ramp-up once we do get first production?

Yes. Let me take that one. So we have a 3-year construction period, but that has not changed. And we have a 2-year planned ramp-up, albeit in our economic modeling with the lenders, they've assumed a 3-year ramp-up. But we are planning on a 3-year construction period and a 2-year ramp-up.

[Operator Instructions] Your next question comes from [ John Parkinson from Fairhaven Investments ].

Congratulations. Just want to get an idea of your current burn rate and your near future burn rate. And can you rule out another cap raise before FID?

Yes. I think -- so thanks for your question, John. So as you know, we did a cap raise last year and our burn rate is a bit over $3 million a month. And when we did that cap raise, we said we had funding runway into Q3 of this year, and that remains the same. And as you know, we're targeting FID before that.

Your next question comes from Al Harvey from JPMorgan.

Just one quick one, I suppose. Just wanted to get a sense if we're likely to get updated economics with the FID around CapEx, returns, basically the whole lot. Do we see that come through with FID or even earlier?

Do you want to answer that, Peter, or do you want...

Sure. Yes. I'm happy to do it. So, look, as we move into FID, I mean, we're continually monitoring all those elements that sit within the financial model. But as we move into FID, obviously, the directors in order to call FID will be wanting to be across all of the matters that sit in the financial model to ensure that there is a reasonable basis for calling FID. If those numbers are to change materially from what was released to the market more recently, we will definitely be updating them or alternatively confirming that they haven't materially changed. So yes, one way or another, we will provide guidance on updated economics out prior to FID.

And does that include, I guess, an assessment of a broader range of rare earth prices?

Yes. So we continue to subscribe to a number of independent consultants for pricing data. And we -- last time we did the financial model update, we prepared that on the basis of a basket of prices, and we're continually monitoring that as we go. They haven't changed significantly. The forward forecasts from what we released in the last update, but we will certainly revise the numbers with whatever data we have at that period when it is called. And again, if there is a material change, we'll again put that out to the market.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Cuzzubbo for closing remarks.

Okay. Thanks, Darcy. And look, thank you, everyone, for attending today. We organized this call as quickly as we could after the announcement went out and hoping that you had the chance to read it beforehand. What I'd just end on is really just summarizing the key points. So today is significant because, one, again, it demonstrates the Australian government support for the Nolans Project, which helps pull in other cornerstone investors. And secondly, it's significant because it shows that we are delivering on our funding strategy as presented last year. If you have any other questions that come up, please, you'll see on the ASX announcement, there are links to send your questions forward, and we would look forward to answering those questions for you. But again, thank you very much for making the time to attend this call. Thanks, everyone.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.