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

Okay. Good morning, everyone, and thank you again for joining us for today's update. I'm Darryl Cuzzubbo, Arafura's Managing Director. And with me today is Peter Sherrington, who's being our CFO; and Tommie Van der Walt, our Chief Project Officer. I'd also like to give a warm welcome to our new CFO, Angela Bigg, who started in the role just a few days ago. A little bit about Angela. Angela brings more than 20 years of experience in the global mining sector across both executive finance and executive operational roles, including being President and Chief Operation Officer of the Rio Tinto Diavik Diamond Mine in Canada. This mix of multi-jurisdictional corporate finance experience and hands-on operational leadership gives her a really unique perspective and puts her in a great position to help us take the company from construction through into operations. Would like to just hand over to you, Angela, for a bit of an introduction.

Thank you, Darryl, and good morning. I'm really excited to be starting with Arafura and be able to participate in a project of this nature and at this stage of its development. I also have a slightly unique perspective being at Northern Territory myself, and being able to be involved in something like this is something I'm really pleased about.

Thanks, Angela. So let me walk you through what we'll cover today. And as we've done in the previous updates, we'll go through a market overview, a summary of what we've achieved over the past year. Peter will then provide you an update on the financials for the year plus where we're at on financial close and offtakes. And Tommie will update you on construction progress. And before we open up for Q&A, I just want to take a moment to thank Peter, given that this will be his last shareholder update with us. So let's start with the market overview. Looking back over the last 12 months, it's been a significant one. We've seen a sustained lift in pricing. NdPr started the year around USD 62 a kilo, peaked at USD 129 and currently sits around $107 a kilo. At the same time, the U.S. and Japan introduced pricing floors of $110, and that actually has had a stabilizing effect on Chinese domestic pricing where it has basically stayed range bound between $100 and $120 a kilo, which really shows how affected these price floors have been. We've also seen 2 new independent and transparent pricing indices emerge over this period being the Benchmark Minerals Intelligence and S&P Platts Index. This matters because China's domestic rare earth pricing isn't transparent. The constituent weights and trading volumes simply aren't disclosed. So frankly, it's more of a policy instrument than a reliable market signal. A few other events that are worthy to call out from the past year. China added MP Materials and USA Rare Earth, the 2 companies most directly backed by the U.S. government to compete with Chinese supply, to its export control energy list back in June. China also effectively embargoed dysprosium, terbium and yttrium exports to Japan. Zero exports of those elements were recorded in June, and that's created a supply crisis for Japanese magnet manufacturers. More recently, the G7 leaders declaration elevated rare earths from simply being an industrial input to being an economic security priority with a real focus on standard-based markets, transparent supply chains, strategic stockpiling and building processing capacity among partner nations. China also added 14 EU entities to its export control list, meaning overseas organizations or individuals can now be penalized by supplying Chinese rare earth materials to anyone on that list. And looking ahead, it's worth remembering that the moratorium on export controls for rare earths between China and the U.S. expires on November 10. So if I had to sum up the past year, there's been a lot of activity building out a rest of world rare earth supply chain, but structurally, China is still very much in control. And that's not going to change quickly. It took China 3 decades to build that dominance, so it's going to take more than a couple of years to establish a reliable, cost-effective alternative. And even though metallization, separation, manufacturing capacity might take 2 to 3 years to build out, you cannot turn on a new mine supply nearly that fast. It typically takes 18 years to find and bring a new mine into commercial production. And that's exactly what makes Arafura's move into construction on the Nolans ore-to-oxide project, the right strategy at the right time. It has taken us years of work to get into this position, and it's a genuinely advantageous one, both for us and our shareholders. If I can now turn to what we've achieved over the last 12 months, it's been an incredibly busy but productive year. We pulled together everything needed on off-taking funding to reach FID, all while competing for attention and support against a lot of other critical minerals projects around the world. And I'd argue that no other project globally is going to have more support than we have. We've secured offtakes into 5 countries. We've secured ECA-covered debt from 5 countries, and we were the first project to receive equity from EFA, the second and the largest from the National Reconstruction Fund and only the second in the world to receive equity from the German Raw Materials Fund with the first project being a project based in Germany. So let me run through some more specific highlights. In terms of government support, we were named 1 of 2 priority projects under the U.S.-Australia Critical Minerals Framework Agreement announced by the Prime Minister Albanese and President Trump last October. As part of that, we secured a USD 300 million letter of support from US EXIM. In terms of offtakes, we secured an offtake with U.S.-based Traxys, the first on an independent transparent price index. We also received further support from the Australian government, becoming the first company to receive an offtake letter of support under the new Critical Minerals Strategic Reserve. And we achieved a binding offtake term sheet with an Indian party, again, on an independent transparent index. Our consistent push for an independent transparent pricing is really paying off. And it matters because we want our investors to have confidence that pricing will reflect market fundamentals just like it does for any other commodity. From an equity perspective, we raised over the required $900 million in equity with further support to be added to that from NRF, EFA and German Raw Materials Fund. I do want to specifically call out Hancock, who took a risk on us early, and honestly, we wouldn't be where we are today without them. It was on the back of all of that we were able to make a final investment decision a few months ago in May. And just lastly on project readiness, we engaged Hatch, our EPCM contractor at the end of last calendar year. We fully established our owners team and are very happy with the caliber that we've been able to attract. We signed a compensation deed with a pastoralist, which included him becoming an Arafura shareholder. We signed a territory benefits plan with the Northern Territory Chief Minister, and we were nominated as the first significant project by the NT government. So looking back on the last 12 months, it's been an incredibly busy year but an incredibly rewarding one as we take the company from development into construction of what will be Australia's only ore-to-oxide rare earth mine and process plan. On that, Peter, I might hand over to you for your update.

Thanks, Darryl. I'd like to start by outlining our cash position and the equity placements completed during the year. So during the year, the company raised over $930 million through 3 private placements and also shareholder purchase plans, including the second tranche of the May placement of $186 million that actually settled after the year-end. At year-end, the company held cash and term deposits of $723 million including the second tranche that's settled in July. On a pro forma basis, the company would have held cash of greater than $900 million. As a shareholder and the CFO, I'm sympathetic to the impact of private placements and that these capital raisings have been significant in securing the equity that's required to fund the development of the Nolans Project. The Arafura team have been mindful of the size of the equity required to execute the Nolans Project and have been mindful to target raising funds on geopolitical events that have driven share price and also project development milestones. Just turning to the project financing. Key project finance agreements, including the common terms, the facility agreements into credit and security deeds and other ancillary documentation are all extremely well advanced at a stage ready for execution with the lenders. All lenders' credit approvals remain current. A small number of lenders require final credit approval in order to move to contractual close. The company envisages these approvals will be completed later this month. Offtake's been a priority, and during the period, as Darryl summarized in his opening, the company has announced 2 binding offtake term sheets during the year, 1 with Traxys North America for 500 tonnes of NdPr and in addition to that, 700 tonnes of Dy and Tb, which were our first heavy rare earth oxides that have been contracted. Following that, we reached a term sheet with an Indian group for an additional 500 tonnes of NdPr and also 7 tonnes per annum of Dy and Tb. Traxys is a significant global trader of specialty minerals and Arafura is pleased to extend this strategic relationship with Traxys through the Traxys North American office offtake alongside the existing agreement with Traxys Europe. The Indian government currently have a specific program running to bolster their processing of mineralization and magnets within India to complement its growing automotive manufacturing. Arafura engaged with numerous groups looking to participate in the Indian rare earth permanent magnet programs and had been selective looking to collaborate with a group that it believes is well placed to play a key role and is aligned with Arafura's objectives in relation to rare earths markets. The Traxys and Indian counterparty term sheets have pricing mechanisms that are referenced to global seaborne index prices for NdPr oxides. The introduction of the U.S. and Japan floor prices placed greater focus on new rare earth magnet feed price mechanisms deviating from the conventional industry practice of referencing the China domestic price. Arafura is working to incorporate internal pricing mechanisms into other offtake arrangements currently being negotiated, but this has been a significant outcome that we've worked hard to achieve. In addition to the Traxys and Indian offtake in May -- last May of this year in 2026, Arafura announced that it received a nonbinding letter of support from EFA potential support under Critical Minerals Strategic Reserve. Darryl has already discussed this. And of course, we continue to work with the Australian government with regards to the letter of support as it relates to potential 500 tonnes per annum of offtake support. I'll close out by addressing strategic investments and contractual close on project financing. In May 2026, the company and NRFC executed long-form documentation in relation to the previously announced AUD 200 million of convertible notes. Arafura will seek to draw down the convertible notes based on its capital expenditure profile after construction commences. In March 2026, Arafura entered into binding subscription agreements for a total of AUD 230 million with KfW on behalf of the German Raw Materials Fund and Export Finance Australia. The equity subscriptions comprise EUR 50 million from the German Raw Materials Fund and USD 100 million from EFA. There's significant linkages between the work streams for offtake project financing and these strategic investments, which creates some complexity. The company is targeting settlement of the EFA and German Raw Materials Fund subscriptions to occur in October 2026, so this year, after contractual close for project financing. On execution of the project finance and settlement of strategic equity, the Nolans Project will be fully funded. The company will be placed to move into project execution. This is a commitment milestone. I want to thank the finance and commercial team for the hard work they've done in the background for the due diligence for lenders, equity investments and ensured the company has been ready to execute private placements at short notice as opportunities emerged. More recently, our efforts have turned to planning to ensure our business systems and governance are appropriate for the next phase of construction, knowing that whilst the funding work streams have been intense, the next phase of project execution and then operations will bring new challenges, which we are now preparing for. I'll now pass to Tommie, who will talk about project execution.

Thank you, Peter. The top 3 priorities for the Nolans Project over the previous quarter has been getting the right people in the right roles, doing the right work, focus on project execution readiness and ramping up the procurement process to be ready for execution after the FID announcement. Now reporting back on each of these priorities, we are happy to share that all roles in a highly capable Arafura owners team has now filled and the Hatch EPCM team has all the required key resources in place. The focus of the team has been and remains on refining the project execution plan and setting up for execution readiness as we head into construction. And thirdly, the procurement process has been ramped up effectively, and the team is executing the procurement strategy as planned. So that covers the last quarter but looking to key milestones achieved towards project execution readiness now, the project is progressing commercial engagement with an expression of interest process being implemented through the Northern Territory Industry Capability Network or ICN. This is aimed at extending the project commercial reach and ensuring suppliers and contractors have visibility on upcoming packages. In support of this process and to encourage local business participation, an industry road show was undertaken in Alice Springs, Darwin and Katherine. The road shows were very well supported with hundreds of attendees from various organizations. The site reestablishment works have been largely completed and is now ready for main construction to commence, and this was done with no safety incidents. Health, safety, environment routines and site access processes have been implemented, including the demarcation of culturally sensitive areas. So then moving on to looking forward to project activities over the next 9- to 12-month period ahead. The Stuart Highway turnoff work package is planned for the end of Q1 for the full year '27, and this scope completes works undertaken previously and is critical to public and project traffic safety at that intersection. Then drainage works and establishment of temporary site offices is planned for Q2 in the full year 2027 in readiness of bulk earthworks, with bulk earthworks planned to commence in Q2 of full year '27. Mobilization of the batch plant is planned for around the end of Q4 for the full year '27, with a start through Q1 full year '28, with concrete works to follow right after that. So in summary, as we head into construction, we continue to do the work and implement the systems to ensure we best position the company to safely execute the Nolans Project and of course, for the best commercial outcome for the business in mind. I now hand back to Darryl to close.

Thanks, Tommie. Look, just one thing, I just really wanted to pull out. So Tommie just referred to the Stuart Highway access works. That actually is the start of construction. When we announced FID back in May, we said we would start construction in September, and those access works will start in the next couple of weeks. And hence, we'll be starting construction proper literally in a couple of weeks' time, which is obviously an exciting time for us. Look, before we open up to Q&A, I did want to take a moment to publicly thank Peter for his leadership and impact over the last 18 years at Arafura. No one has put in more sustained effort or leadership to get us to where we are today than Peter has. I was reflecting on this recently. If you think about it, there's a reason other rare earth projects don't even attempt to go all the way to oxide stage processing. They see the funding challenge is too difficult. Peter, as CFO, took the challenge head on, and it's because he did, despite more than a few naysayers along the way, that we're now in a genuinely unique position to take advantage of the urgent need to diversify supply chains. Just to put the scale of that challenge into perspective, if you include the completion support that Peter and his team been able to secure, Peter and his team took on the job of raising around 10x our market cap at the start of the process. I honestly can't think of any other company who has pulled that off, and it was his offtake-led followed by ECA debt strategy that made this possible. And it wasn't just a great strategy either. It took an enormous amount of effort. Peter and his team are often still in the office late on Friday evenings, in on weekends and taking late night calls with European lenders and offtakers. We wouldn't be where we are today without you, Peter. So on behalf of the Arafura Board and management team, we want to thank you, and we're genuinely grateful. So Penny, I think with that, I'll hand over to you to open up to Q&A.

Thanks, Darryl -- go ahead, Darcy.

[Operator Instructions] As there are currently no questions at this time, I'll hand the conference back over for any webcast questions to be addressed.

Thank you, Darcy. Let me just start by a couple of questions. There are quite a few coming through on the webcast. What I'll do is probably summarize this, Darryl, for yourself and for participants. So I guess we have commented on the actual physical start date. Can you provide some more clarification in terms of some of the major works and where they -- when they will be starting?

Yes. Sure, Penny. And Tommie did touch on it. So the start of construction proper -- so firstly, we've already reestablished the site. So we spent a bit of money on getting the site ready. And most of that work has been completed. The access works that allows, if you like, the broader construction activity to commence will start in about 2 weeks' time. The next large contract, as Tommie mentioned, is the bulk earthworks, which we expect to release the middle of next quarter. And we really want to get our bulk earthworks done by the middle of next year, which then allows concrete works to start. So that's kind of, if you like, a high-level critical path for the next 6 months.

Thank you. This one is probably best directed towards Peter. Peter, from [ Peter Collis ], can you please tell us the Nolans expected annual DyTb output? And what percentage of that is currently locked into binding offtake agreements? And what is the plan for selling the remainder? And then a follow-on question from that, can you advise if the pricing for these contracts are index priced or if there are any floor mechanisms involved?

On the DyTb, there's roughly about 40 tonnes of DyTb that we recover through processing. So it's a part of the said heavy rare earth product. So it's always been part of the product stream. It's contained within that. So in terms of -- we've already contracted 15 tonnes or thereabouts with Traxys North America and also with the Indian counterparty. In terms of placing the rest of the product, we probably are looking to try and match the Dy and Tb with the customers who require the NdPr to go with it. So the Dy and Tb is critical to the manufacturer of magnets that operate in high temperature environment, so high performance environment, so they don't lose their coercivity at higher temperatures. So these -- predominantly the EV automakers will have a requirement for those products. In terms of pricing of those products, we will be unlikely to put a floor in, but we do have different pricing methods. In terms of some -- in some instances, we will negotiate an annual price. We believe that demand will be significant and supply will be tight for some period of time. And in some instances where the customer wants a pricing mechanism, we will look into price it accordingly given that there will be tightness in the marketplace. But I'm just not going to disclose what those pricing regimes. They're commercial in confidence.

Of course. And perhaps as a follow-on to that question, and this is probably perhaps Darryl or Tommie, can you just elaborate on the studies that are underway to either increase the recoveries of heavies and/or separate heavies further?

Yes. So maybe let me make one comment and Tommie, you can talk to it a little bit more detail. So it is -- and look, we detailed this, right, in our quarterlies previously. So we are looking at a separate project to process additional heavies, so one, recover additional heavies from the waste stream. So Peter mentioned the 40 tonnes of DyTb. That will take it to 50, 55 tonnes and also processing it to a separate DyTb oxide, but that's a separate project. And it's a project -- are subject to a different -- a separate decision, which we will obviously come to the market with at a later point. Tommie, did you want to make any additional comments to that?

No, that's perfectly accurate.

So another question just in regards to the ore-to-oxide process and once you've made a hole in the ground. From what the shareholders read, the refining process in China is highly pollutive. Can you please outline how the process will be conducted more safely in Australia?

Yes. So let me answer that, and then, Peter, Tommie if you got anything to add, just jump in. So firstly, you can imagine with our 9 lenders, 5 countries, we have to meet all the different international standards. So you can process rare earths in a very environmentally responsible way. And in fact, if you look at Lynas, they're doing that. You look at the process, is very similar to hydromet solvent extraction processes that you see at Olympic Dam. So you can absolutely apply international environmental standards to what we're doing, and we are doing that and need to do that to satisfy our lenders' requirements. And everything that we do meets the different international and Australian engineering standards as well. Peter or Tommie, did you want to make any additional comments on that?

I suppose for the Nolans ore to oxide, one of the key differentiators with other processes is that all the waste material's handled on a single site, which perhaps is different projects do different things. In China, a lot of processing is done at separate sites, which means waste is dealt with in different locations, whereas all ours is under one single residue storage facility permitted with one regulator.

Yes. In addition to that, the environmental impact similar to any sort of safety impacts or economic impacts is part and parcel of the design criteria to ensure that whatever is designed will get the best outcome from an environmental perspective.

Just to pick up on -- sorry, Penny. Just to pick up on Peter's point, too. So everything that we process, we neutralize. And basically, what we put back in the ground is what we've taken out of the ground.

Okay. So if we move along to the indicative timetable, can you please just provide some guidance in terms of how long after commencement of construction until you have product to sell? And then what is the period of time until we actually reach like a mechanical completion, if that's something you can provide guidance on?

Yes. So let me make some comments. And again, Tommie, you jump in, right? So we have a 37-month construction schedule from the start of construction in a couple of weeks' time. To do the maths on that, we expect practical completion towards the end of 2029, at which we will move into commissioning and ramp-up, which we're forecasting to be a 2-year process. Now from a funding perspective, it's been assumed it's a 3-year process, but we are working to a 2-year ramp-up. So that would see, if you like, production reaching nameplate at the end of '31, early '32 but with first production at the end of 2029. Tommie, any additional comments to that?

No, Darryl, that is accurate.

Okay. Peter, from one of shareholders, [ Andrew Billard ]. Wanted to thank you for your many years of service, very grateful for your contribution to the company. What he would like to understand as well is whether the debt will be finalized and binding prior to your departure? And also whether or not what the conditions are around the U.S. government $300 million debt facility. Is this something that is being pursued and will be executed as part of the full debt stack?

So thanks, Andrew, for the recognition. In terms of the debt facilities, so I mean, one of my main objectives is going to contractual close at the time we leave. It's also critical to settle on those strategic investors as well. So whilst contractual close is an important milestone, there are other important milestones along the way the debt facilities, including first drawdown and financial close. But certainly, that is a milestone that we're looking to wrap up in the period whilst I finish here. There was a second part to the question, sorry, Penny.

The U.S. debt and whether that is part of the total debt stack that is in place at the moment and whether or not that is something that is being looked at to close.

Yes. So the -- so we have USD 775 million of senior debt facilities, which actually excludes the letter of support or letter of intent from US EXIM. The US EXIM facilities are not something that we consider as part of the senior debt facilities. It's an opportunity that's to be pursued perhaps alongside any project expansion, whether it be for heavy rare earths or a Stage 2. At present, it's deemed as part of that initial debt stack.

And can you comment on the Canadian facility and what that's tied to? With it being ECA financing, what's the reciprocal arrangements?

Yes. So some of our procurement is Canadian-based in terms of engineering services. Some equipment packages are based there. There's quite a bit of connectivity to the Canadian market for some significant parts of procurement at the project, yes.

Okay. One other question that [ Andrew ] had, which I will address. There was a question as to the July quarterly. We had opted not to do an investor briefing as part of the July quarterly. The rationale behind that [ Mr. Billard ] was that we had both the AGM at the beginning of July, where we provided a significant material update in terms of progress, updated on feed and construction. And then we also had this call coming up at the end of full year results. So we felt it would be a duplication essentially of information and perhaps we were better to spread that over the key milestones. So I hope that answers your question there. Darryl, the share price performance hasn't met expectations. As a reflection of the performance, is that a reflection of the performance of the Board? And then what are we doing as a company to turn -- to improve the share price going forward?

Yes. Good question. So firstly, you're not alone on that. I mean it's a bit of a crazy situation, right? So if you look at the amount of cash that we have on the balance sheet, that is not much different to our market cap. So talking to an investor recently and using his words is, yes, investing in Arafura at the moment is like having a free option. So just if you take a broader look, you look at other rare earths projects, they have also pulled back. So some of the, if you like, the attention has come off the rare earths sector. I think we're seeing, if you like, the impact of that. If I talk to what's in our control and there's 2 things in particular, so firstly, we continue to get in front of investors and say, "Hey, we can bypass China, and we're the only project that can that is in construction." So look across the globe, we are very well positioned, uniquely positioned to be alternative to China, and there's not a lot of competition in that space, so we'll continue to make that position. There will no doubt be a catalyst at some point. That brings attention back into the rare earths sector. And I'd like to think that with this positioning in front of investors that we will see a rerating, and I'd like to think it will be a little bit stickier given that work. But the second thing that we have to do is we're now in construction and we need to deliver on our milestones in construction. I mean you look at Lindian, right? They've been in construction. They're delivering on their milestone to look at their share price. So there are 2 things. One is continue to remind the market how we are uniquely positioned. And the second thing is delivering on our construction milestones.