ASX ANNOUNCEMENT NOLANS PROJECT UPDATE 11 May 2021 Arafura Resources 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: [email protected]• Feasibility study update confirms Nolans’ ultra-low operating costs of US$24.76/kg NdPr oxide • Robust financial metrics with NPV of $1.4 billion, IRR of 18.1% and average EBITDA of A$354m per annum based on a LOM of 38 years • Targeting commencement of Front-End Engineering and Design mid-2021 • Feasibility study update to provide the basis for securing finance through export credit agencies and other sources Arafura Resources Limited (ASX:ARU) (“Arafura” or the “Company”) is pleased to report on the completion of the feasibility study update for its 100%-owned Nolans Neodymium-Praseodymium (NdPr) Project in the Northern Territory. The recent strength in rare earths prices and increasing interest from financiers and potential offtake partners, along with project changes determined through optimisation work, provided strong rationale for Arafura to review the findings of the Nolans definitive feasibility study (DFS) delivered in February 2019. Elements of the project that have been refined or optimised since then include the process flowsheet (following completion of final stages of pilot program); process plant design (deferral of cerium production and minor increase in concentrate processing capacity); and mine scheduling (factoring in Ore Reserve update announced March 2020). The updated cost estimates and financial outcomes reported in this announcement will now form the basis of discussions to finalise funding for Nolans, with Arafura targeting a Final Investment Decision in August 2022. Ahead of this – and in keeping with the revised execution strategy articulated recently – Front-End Engineering and Design (FEED) activities are expected to begin next quarter. Following the feasibility study update, key project information and financial metrics for Nolans are as follows:
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Non-Process Infrastructure - Perm Camp, Bldgs/Wshops, Power, Water etc.
Mine Access & Surface Water Management
RSF Construction
COMMISSIONING & RAMP-UP
Process Plant Commissioning
Mining Establishment & Pre-Production Mining
Ore Commissioning
First Production
Works Activity
Execution Readiness FEED Phase
2021 2022 2023 2024
Early Works
ConstructionConstruction Production
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Capital Cost Estimate
The updated capital cost estimate has been developed to reflect the flowsheet changes, throughput changes,
execution methodology changes and market impacts on rates since the development of the DFS capital cost
estimate. The DFS capital cost estimate has been used as a basis for the updated estimate.
The basis of estimate for the updated capital cost estimate is as follows:
▪ Major equipment supply has been either updated by budget quotation or scaled from the DFS cost
based on any change in throughput.
▪ Bulk materials costs have been adjusted from the DFS estimate by scaling costs based on changes in
mechanical equipment costs.
▪ Growth and wastage allowances have been included as per the allowances in the DFS.
▪ Construction labour rates have been based on the DFS labour rates adjusted for inflation and a revised
construction FIFO schedule (3:1) and validated based a recently completed early engineering works
(EEW) program.
▪ The estimate has been compiled on the following execution basis:
- Combination of engineering, procurement, and construction management (EPCM) and EPC
package execution.
- Asian supply and fabrication of structural steel and platework.
- Traditional field installation with equipment and bulk materials brought to the site, with the largest
possible items able to be transported via standard gauge road transport.
▪ Major NPI rates and quantities have been based on updated preliminary designs and updated budget
quotations, with minor costs included unchanged from the DFS.
▪ EPCM costs have been revised to match the updated execution strategy.
▪ Owner’s costs have been updated by first principles based on the contract with KBR for the IPMT.
▪ Project indirect costs have generally been included based on detailed estimates and aligned with the
execution plan and schedule and have been validated by EEW program.
▪ Sulphuric acid plant first module only is included, however preliminary works such as earthworks,
concrete and tie-in points are included for the remainder of the sulphuric acid plant.
▪ Sunk capital, deferred capital, pre-production costs, working capital and escalation are excluded.
▪ The contingency has been adjusted based on the quantitative risk analysis completed during the DFS
increasing the contingency to A$126.2m.
The estimate has been compiled in Australian dollars (at fixed exchange rates as used in the DFS of USD:AUD,
0.72 and EUR:AUD, 0.595) and then split back into the native currencies in line with the currency breakdown in
the DFS. The estimate was entered into the financial model in the native currencies with the difference reflected
as a foreign exchange adjustment. The estimate is consistent with a ACCE Class 3 estimate.
The final updated capital cost estimate is presented in Table 5.
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Table 5: Feasibility Study Update Capital Cost Estimate
Overall Project Capital Cost Estimate Summary by Area
Description A$M
Mining Infrastructure 27.0
Beneficiation Plant 43.3
Hydrometallurgical Plant 567.6
Sulphuric Acid Plant (Module 1) 34.6
Non-Process Infrastructure 121.8
Total Direct Cost 794.4
Temporary Construction Facilities 11.9
Travel & Accommodation 11.9
Detailed Engineering & PCM 62.7
Mobile Fleet 5.6
Owner’s Cost 42.4
Import Duties 2.8
Total Indirect Cost 137.2
Contingency 126.2
Forex Adjustment (1.5)
Escalation Excl.
Total 1056.3
Note: Numbers may not compute due to rounding. Forex adjustment represents the adjustment to the total capital cost
estimate when moving from the fixed estimate exchange rate to the variable exchange rate applied in the financial model
over the construction period.
Deferred capital costs for the expansion of the sulphuric acid plant totals A$93.1m scheduled to commence in
the first year of production. Deferred capital for the chlor-alkali plant totals A$42.7m scheduled to commence
in the sixth year of production.
Operating Cost Estimate
The operating costs presented in the DFS have been reviewed and updated where consumption, costs or
methodology has changed. The major impacts on the changes are as follows:
▪ Mining costs were updated by first principles based on the updated mining schedule, mine design and
budget mining contractor submissions.
▪ Labour costs were reviewed with only minor changes from the DFS for some increase in requirements
and minor cost updates, although the final labour cost will be dependent on the labour market
conditions at the time of commencing operations.
▪ Reagent consumption was updated based on the updated process mass balance with major pricing
adjusted as follows:
- Sulphur price was updated according to a long-term supply cost forecast from CRU with shipping
cost adjusted based on advice from a bulk shipping company.
- Caustic soda, hydrochloric acid and hydrogen peroxide prices were updated from domestic
suppliers.
- Oxalic acid, a new reagent for the project update, was priced by a domestic supplier.
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▪ Consumables were adjusted based on the change from ion exchange to nano-filtration to represent the
change from resin to membrane consumption. Other consumables were adjusted for anticipated
consumption.
▪ Power generation costs were updated to represent the change from reciprocating gas engines to less
efficient gas turbines (with the offset benefit of generating the increased steam consumption) based on
a budget quotation for a power station installation on a build, own and operate (BOO) basis.
▪ Gas pricing was updated based on advice from a gas supplier feeding into the Amadeus Gas Pipeline.
▪ Transport and logistics rates, for both incoming and outgoing freight, have been updated by Qube Bulk,
who completed the analysis on transport and logistics for the DFS.
The accuracy of the operating cost estimate remains in line with the DFS and an ACCE Class 3 estimate.
The overall average operating cost, derived from the financial model, is presented in Table 6 and by operating
year in Figure 10.
Table 6: Feasibility Study Update Operating Cost Estimate
Project Operating Cost Estimate Summary
Description A$M US$/kg NdPr
Contract Mining 38.14 6.25
Labour 26.07 4.27
Reagents incl. transport to site 68.77 11.26
Consumables 9.07 1.48
Power & Gas 35.67 5.84
General Transport & Logistics 5.78 0.95
Maintenance 12.64 2.07
Laboratory 2.63 0.43
General & Admin 8.34 1.37
Total Mine Gate Cost 207.10 33.91
Mine Gate Phosphoric Acid Credit (55.90) (9.15)
Mine Gate Cost net of Phosphoric Acid Credit 151.19 24.76
Rare Earth Product Transport Cost 0.69 0.16
Note: Numbers may not compute because of rounding. Average costs are calculated as the arithmetic annual average
following the anticipated two year ramp up period and excluding the final years of production from low grade stockpiles.
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Figure 10: Nolans Operating Costs by Operating Year
Marketing
Rare Earth Market
Based on reported pricing by Asian Metal, the NdPr oxide price increased over 60% in the last six months
(December 2020 to May 2021) reaching US$84 per kg in May 2021. The price increase in 2021 is attributable
to the following market trends:
▪ Strong demand for rare earth (NdFeB) permanent magnets in the Chinese domestic and overseas
markets driven by e-mobility, wind turbine, consumer electronics and other advanced applications.
▪ Lower NdPr inventory held by Chinese processors and insufficient supply through Chinese quota and
imports to meet the growing internal and export demand for magnets.
Global demand for NdFeB sintered magnets is driven by increased use in clean energy technology and e-
mobility and forecast to grow at a compound annual growth rate (CAGR) of 6% to 2030. Production of NdFeB
magnets is expected to double over the next five to ten years and new energy vehicle (NEV) application is
expected to grow by 17% to 2030. This accelerated expansion of vehicle electrification and the renewable
energy transition will increase demand for NdPr oxide and use of NdFeB magnets at a much faster rate over
the forecast period.
The outlook for NdPr oxide supply and demand is favourable indicating a looming NdPr oxide supply deficit
with NdPr oxide prices to remain at current prices in the short term and rising over the medium to long term
forecast period. The supply tightness will encourage the development of new projects outside China to meet
the supply shortfall, however, new entrants present challenges with access to project capital and long lead-
times to reach full production.
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To meet future projected demand for NdPr oxide, supply is projected to increase through the commencement
of several advanced rare earth projects and continued expansion of the Chinese domestic supply under strict
production quota control. Additional supply through new projects is unlikely to keep up with overall demand
as limited projects are forecast to come into production before 2025. Additional capacity is expected to be
developed in Australia and North America with China’s supply control expected to be reduced in the next
decade as new rest-of-world (ROW) supply emerges. Supply growth of 50,000 tonnes per annum of NdPr oxide
is required over the next decade, which is equivalent to several Nolans projects over this period of time.
China also plans to become a major NEV manufacturer and relies on domestic supply and the continued
expansion of imported NdPr bearing material to meet internal demand with preference to supply NdPr oxide
to Chinese magnet producers and the Chinese domestic automotive industry. China’s ability to increase
production rapidly is becoming constrained through improved environmental standards, resource preservation
strategies, production quota control with higher operating and environmental costs of new supply is expected
over the next decade.
Rare Earth Price Forecast
Forecast prices have been sourced from several independent consulting groups providing market supply and
demand analysis and price forecasts. The independent price outlook used in the feasibility study update is
based on NdPr oxide market supply and demand dynamics driven by macroeconomic and geopolitical events,
global projection of NdFeB magnets and forecast production and supply.
Forecast prices for middle and heavy rare earth products are also supplied through and independent agency
and the pricing mechanism is based on 35% realizable value of the contained value of the rare earth oxide
composition in the Nolans SEG/HRE oxide product and based upon the estimated range if discounting in the
independent report.
The Company has utilised a consensus price in its financial evaluation of the Project. A consensus price for
NdPr oxide has been derived from a rolling forward average calculation commencing in 2025 utilising prices
forecast on a real basis from two independent market analysts1. The consensus price for NdPr oxide of
US$87.00 per kilogram is a conservative price estimate given spot price is currently at $82.912. Figure 11 shows
the basis of the derivation of the NdPr oxide consensus price.
A consensus price for Nolans SEG/HRE product has been derived in a similar manner to the NdPr oxide
consensus price from Adamas Intelligence. The consensus price for the SEG/HRE product is US$9.86 per
kilogram.
1 Adamas Intelligence and CRU have supplied price forecasts for rare earth oxides covering the period from 2020- 2030 which
were used to calculate the financial evaluation of the Project based on its life of mine inventory. 2 Average NdPr oxide prices calculated using Asian Metals by calendar year. 2021 utilises pricing for the period 1 January
2021 to 30 April 2021. Current spot price of $82.91 as at 30 April 2021.
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Figure 11: NdPr Oxide Consensus Price
Phosphoric Acid Forecast
Phosphoric acid prices in 2021 are rising after a subdued period in 2020 with increased demand for phosphate-
based fertilizers in the Asia-Pacific region and stronger demand for Indian phosphoric acid trade. Medium and
long-term phosphoric acid price projections from CRU through to 2030 predict future price growth from 2025
after declining from peak prices in 2021. Long-term, prices over the forecast period are anticipated to rise due
to tightening supply, greater Indian fertilizer demand growth and slower capacity additions by major producers
in Middle East and North Africa. CRU is predicting a tightening supply of acid with continued increased demand
for fertilizers in the Indian markets and other Asian regions creating higher projected export prices.
The latest price forecast for phosphate, on an FOB-Darwin basis, shown in Figure 12.
Figure 12: P2O5 Forecast Price
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A summary of the pricing assumptions used in the financial evaluation is shown in Table 7.
Table 7: Summary of Pricing Assumptions (US$/kg for Rare Earths, US$/t for P2O5)