Stock of the Week Arafura Resources (ARU)


Arafura Resources (ARU) is an emerging rare earths producer with its sights set on bringing its world-class Nolans Project into production in 2013.

Rare earths are essential to products in markets associated with the electronics and technology industries, energy efficiency and greenhouse gas reduction.

Nolans Bore is one of the few truly world‐class near‐term supply sources, providing ARU with the means to possess a piece of the rare earths pie.

Rare earths are creating a lot of stir at present on expectations of significant future demand. China currently produces about 97% of the world’s rare earths, and has restricted world supply over the past few years – driving up rare earth prices 310% over the first half of 2010.

ARU is in the enviable position of being an Aussie rare earths contender and the group intends to become the pre-eminent supplier of rare earths to the world.  Its fortunes have seen it become one of the stock picks of many investors.

In the background ARU is exploring for other metals, including uranium, copper and gold.

Commodities have strengthened of late on global economic recovery signs, which is a positive for ARU going forward.

Rare earthly treasure

Over the last year, there has been growing market awareness that rare earths are essential components in a range of everyday products.

These products include high-demand technological equipment such as iPods, mobile phones and LCD TV screens.

Rare-earth based new technologies are being rapidly adopted across the globe as electronic media becomes an essential part of the personal apparel and business environments

Rare earths are also used in clean energy applications, such as wind farms and hybrid cars; and in energy efficiency products, such as new generation light globes.

It is now widely recognised that there will be a significant supply shortfall for rare earths in the near term.

ARU is in the enviable position of possessing one of the few major rare earth deposits in the world: the Nolans Bore deposit in central Australia.

Nothing Boring about Nolans

The Nolans Bore deposit is a very valuable, long-life and easy to exploit resource – one which any major resources company would be proud to have.

In the last four years, ARU has made a significant investment in developing a patented chemical process to extract and recover rare earths from the Nolans Bore Mine in the Northern Territory.

In September 2010, ARU announced the selection of Whyalla in South Australia as the site for its Rare Earths Complex.

This is a major milestone in the company’s history and will allow ARU to value add to resources from its Nolans Bore deposit.

The scale of the proposed plant and associated infrastructure was recognised by the South Australian Government, which has granted Major Project status for the complex.

The project is underpinned by a world-class rare earths deposit which has sufficient resources to support mining and chemical processing operations for at least 20 years.

Annual production of 20,000 tonnes of rare earth oxides from the Whyalla Rare Earths Complex, equivalent to about 10% of the world’s supply, is on schedule to commence in 2013.

The Nolans Project means ARU will in the next few years become a long-term supplier of rare earth oxides, phosphoric acid, uranium oxide and gypsum.

The Nolans Bore deposit is currently at 30.3 million tonnes of measured, indicated and inferred resources.

Exploration focus

ARU carefully balances its priority to develop the Nolans Project with the need to deliver future growth through exploration success, as well as assessing new development opportunities.

Regions ARU are currently exploring include The Reynolds Range, which is highly prospective for the discovery of base metals and uranium.

Another focus is the Hammer Hill Project, with ARU focused on the discovery and development of copper-nickel sulphide resources.

ARU’s Kurinelli project is another region of interest. Kurinelli has not been explored before using modern exploration techniques, and it represents an outstanding opportunity to discover a new gold district.

ARU also boasts gold exposure through the Mt Porter gold project, which has a Native Title mining agreement and environmental approval from the NT and Australian governments.

ARU’s exposure to these commodities provides for an extra feather in its cap at a time when commodities are making massive gains.

Gold price has repeatedly hit record highs of late, and copper is also performing strongly with a 2% gain in price last week.

Cash position

ARU has a market capitalisation of around $284 million as of 22 September 2010.

The company has cash of $23.5 million at the end of its 30 June quarter.

In its recent annual report, ARU admitted to a loss after tax for the year of $10.1 million and a net cash outflow from operating activities of $6.5 million.

Despite the yearly profit loss, ARU has sufficient cash and assets to meet its ongoing development and exploration commitments.

ARU will raise additional funds to meet working capital requirements into the future.

Outlook

ARU specialises in a lucrative commodity: rare earths. Rare earths provide environmentally friendly solutions through an array of applications aimed at achieving energy efficiency, and in developing green technologies.

Rare earths are also in increasing demand worldwide for use in devices that are central to our modern lifestyle.

As a result, ARU has been one of the hot stocks in recent months, alongside other rare earths miners such as Lynas Corporation.

ARU’s vision is to be the pre-eminent supplier of rare earths to the world, and once Nolan production is online the company will be in the lucrative position of possessing a “green” commodity that is increasing use in modern technology.

In the background ARU is exploring for other metals, including uranium, copper and gold. Commodities have strengthened of late on global economic recovery signs, which is a positive for ARU going forward.

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