Shares in the Gina Rinehart-backed Arafura Rare Earths (ASX: ARU) soared as much as 30 per cent today to 15 cents on the biggest turnover in more than nine months after the company inked a deal to lock in a $200 million investment commitment from the Australian Government’s $15 billion National Reconstruction Fund Corporation (NRFC).
The company says the funds, structured as unsecured convertible notes, will speed up the development of its massive Nolans rare earths project in the Northern Territory, potentially delivering the country’s first fully integrated ore-to-oxide rare earths processing operation.
The execution of a binding funding package is now likely to be a catalyst for the additional equity funding required to move the development closer to full development funding, the company says.
Equity financing is expected to be announced at the same time as Arafura makes a final investment decision for the project, which the company previously flagged would be around the beginning of this year.
In signing the deal, the NRFC also noted the funding was evidence of its commitment to diversifying Australia’s industrial base and advancing its critical role in the global transition to net-zero emissions.
This deal has been months in the making and de-risks the equity funding required for the development of Nolans.
Arafura Rare Earth Managing Director Darryl Cuzzubbo
The convertible notes will carry a 15-year maturity, with a seven-year conversion period that begins two years into the term. The notes can then be converted at a remarkable 40 per cent premium to a future equity raising price yet to be determined but set at the time of the project’s final funding round.
During the conversion period, interest on the outstanding amount will be at an annual rate of 3 per cent added to the three-month bank bill swap yield (BBSY), currently trading at 4.35 per cent
The interest charge, known as a coupon, will be paid quarterly, not in cash, but in new shares in the company, freeing up cash flow to be applied directly towards the capital development costs.
NRFC could decide not to convert the notes into shares and the interest on the coupon will instead jump by an additional 3 per cent, bringing the total rate to the three-month BBSY plus 6 per cent per year.
The Nolans rare earths operation is a shovel-ready, world-class neodymium-praseodymium project in Australia’s Top End and sits about 135km north of Alice Springs. The project has a resource underpinning 4440 tonnes per annum of neodymium-praseodymium oxide production and a minimum 38-year mine life.
In July the company revealed it had received conditional approval for US$775m (A$1.24 billion) in debt as part of its US$1.013b (A$1.62b) total debt requirement to move the project towards full funding. On the equity side of the ledger, US$713m (A$1.14b) needs to be raised to complete the financing package, before a final investment decision can be made.
Given the quantum of funding required for the massive project and a certain loss of appetite from investors more recently to back resources in general, the market has - perhaps not surprisingly - been nervous about the prospects of getting the Nolans project across the line.
Today’s positive reaction to the funding news may suggest Arafura has reached a breakthrough moment, with a final equity raising and final investment decision being some of the last remaining obstacles left to overcome, before mine construction can start in earnest.
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