ASX: ARU 19 October 2010 RESOURCE CAPITAL RESEARCH SETS ARAFURA MID-TERM TARGET PRICE OF +A$3.00 Resource Capital Research (RCR) recently published a research note on emerging rare earths producer Arafura Resources Limited (ASX: ARU) commenting that "the market has welcomed ARUs choice of Whyalla (SA) as the site for a chemical plant to produce rare earth oxides, with feed from its globally significant Nolans Project (NT).

Recent share price gains (+171% in 3 months) could continue.

RCR set a mid-term target price for ARU of +A$3.00/share (currently trading at circa A$1.74/share). In its research note RCR reported: Introduction: Arafuras flagship is the Nolans Rare Earths-Phosphate-Uranium Project (NT), 135km NNW of Alice Springs.

The deposit has a JORC resource of 30.3mt containing 848kt of rare earth oxides (REO), 3.9mt of phosphate (P2O5), and 13.3mlbs of uranium (U3O8), with potential to expand.

A Bankable Feasibility Study (BFS) is expected in 4Q11.

Mining is planned for 2013, when the Nolans Project could supply ~10% of the global rare earths market. ARU holds +5,000 sq km of grassroots to advanced exploration +projects (REE, Au, Fe, Ni) in the NT. Nolans Project: Planned annual production from Nolans is 20kt REO, 80kt P2O5 (as phosphoric acid), 0.5mt CaSO4 (gypsum) and 0.33mlbs (150t) U3O8, with 400kt CaCl2 as residue that could be recycled into the chemical process.

Mining rate, by open cut, will be 1mtpa with mine life +20 years.

Processing will be in three broad stages: concentration; acid leaching into RE/uranium and phosphate streams; and production of final commodities such as REOs.

Key inputs are chloralkali and sulphuric acid.

The waste material would include Th, which is slightly radioactive (alpha) and must be stored appropriately. Forecast capital costs are A$950m (@ A/US 0.95) with 20% contingency, including A$690m for the chemical plant.

Opex could be A$376mpa (chem. plant A$291mpa), i.e.

US$376/t ore at 1mtpa.

Infrastructure, includes a railway and gas pipeline.

Road distance to the Darwin-Adelaide rail line is 65km.

On-site concentrate production would precede rail transport to a chemical plant.

Whyalla Rare Earths Complex (SA): The major industrial port of Whyalla (1400km rail from Nolans) was chosen in September 2010 as location for the chemical plant.

ARU has signed an Exclusivity Deed for 800ha land with OneSteel (ASX:OST), which controls the port.

The purchase is expected to be finalised in 4Q10.

The Complex will include facilities for producing feed chemicals and final products.

The South Australian Government has granted Major Project status, providing certainty for work programs.

A final decision to build should follow the BFS and project finance. Development schedule: ARUs recent focus, finishing the Nolans Bankable Feasibility Study, has been put back to 4Q11 after the scope was broadened due to improving credit markets.

Announcements in 4Q10 should include a Mine Optimisation Study with mining reserves.

Groundwater studies began 2Q10 ahead of an EIS for the mine site in 2Q11.

De-risking of the chemical process is far advanced, with pilot and demonstration level process testing under way, focused on beneficiation optimisation, the RE/REO stream (ANSTO, Bateman) and acid recycling (Aker Solutions).

Subject to finance in 4Q11, construction could begin in 2012 and production in 2013. Valuation: NAV is highly sensitive to REO prices.

At a long term US$30/kg for the Nolans REO blend (current +US$50/kg), with U3O8 at US$50/lb, phosphate US$750/t and gypsum US$25/t, revenue would be US$689m/yr.

Using opex/capex from the Oct 2010 economic update and a 30% pre-BFS discount, Nolans after-tax NPV is A$1,967m (10% DR, AU/US 0.8), or NAV A$6.39/share (fully diluted with cash and exploration assets).

After dilution from raising 50% of A$950m at a nominal A$2.00/share, NAV is A$3.61/share.

Risks to the valuation (both upside and downside) include the AU/US exchange rate and the REO price, especially given the relative unpredictability of any market controlled by a single supplier, i.e.

China, the major (+95%) REE producer. There is upside risk from an increase in the Nolans resource, and potential downside in delays (process, permits, finance). Investment Comment: ARUs share price has increased 71% in the past month due to high REE prices and well received news about the Whyalla chemical complex.

This trend should continue if ARU keeps meeting its development milestones: a price of +A$3.00/share could be reached after project finance is established (expected 4Q11).

The force driving Nolans to production will continue to be increasing REE demand (7%-9%pa) over the next 5 years, against a background of supply constraint and export quotas in China.
To download the research note click here: http://esp.gewru.com/download/files/12414/1259533/20101015%20-%20RCR%20Report.pdf For more information contact: Steve Ward Managing Director Arafura Resources Limited T: +61 (8) 6210 7666 Felicity Nuttall Professional Public Relations T: +61 (8) 9388 0944 M: +61 (0)430 184 599
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