Industrial raw materials supplies are at the forefront of policy discussions for most industrialised nations today. Some are at more advanced stages than others, but most have either enacted or are evaluating a viable critical minerals supply strategy, which begins with a critical minerals list of raw materials vital to the so-called ‘green transition’.
Security of supply is often seen with the involvement of long-term offtake contracts of materials/minerals/products. In addition, real security is taken further with participation in the upstream financing of a mineral deposit coupled with subsequent offtake of resultant product.
So, let us look at how one such arrangement/development is panning out in this regard. Germany is working closely with the Australian company Arafura Resources and other entities to help develop the Nolans rare earths mining project in Australia’s Northern Territory, with the ultimate aim of ensuring supplies of rare earth materials for German industry once the project is up and running.
Sound familiar? It should. At the end of last year, we saw the German export credit agency (ECA) Euler Hermes provide ‘untied’ loan of $800 million and $3 billion to trading company Trafigura for the supply of unspecified critical minerals and LNG to German industry. This is nothing to do with Australia by the way – it’s just relevant because of the increase in usage of the ECA product in this untied way (untied meaning that it is not tied to an actual German export).
In the case of Arafura’s Nolans project, Euler Hermes of Germany agreed in late March 2023 to provide Arafura Rare Earths with a ‘non-binding letter of in-principle support for an untied loan guarantee’ of up to $600 million (US$ that is by the way). Yes, it’s a bit of a mouth-full that, but what it means is that various other criteria and financing stages must be first met by the company before the $600 million guarantee actually becomes binding. This is quite a normal procedure for a project such as a mining deposit in its relative infancy.
Arafura has said that if approved, the guarantee would be conditional on Arafura entering into offtake agreements with German-based companies, and the corresponding quantities of neodymium praseodymium (NdPr) products (these are highly sought-after magnet products) ultimately being processed in Germany into permanent magnets or powertrains. Any final guarantee amount will be determined with reference to the offtake volume processed in Germany, final offtake structures with German companies and NdPr market conditions at the time. But let’s backtrack a bit, and look at this development in a bit more detail.
Nolans rare earth project makes solid progress
Arafura’s Nolans project is a rare earth ore to oxide mine and processing facility in the Northern Territory some 135 klm north of Alice Springs. The estimated A$2.4 billion ($1.7 billion) project is Australia’s first vertically integrated rare earths operation, where its single site mining and processing operations (including waste disposal) will provide a secure and traceable supply chain to meet domestic and international economic and security interests and the ESG needs of global customers.
The project is believed to be one of the only advanced ore-to-oxide projects of scale in the Western world and is expected to produce 4,440 tonnes of neodymium-praseodymium oxide a year when it hits peak production in 2028. Early works construction began this month, and initial production is expected in 2025.
On the financing front, in the very early stages of development, back in mid-2021 Arafura received a non-binding letter of support from Australia’s ECA Export Finance Australia (EFA). That letter was in relation to a proposed 15-year senior debt facility of up to A$200 million. The facility was planned to cornerstone a broader banking debt facility to be progressed with a target mix of foreign ECAs and commercial banks. At the time, Arafura engaged Macquarie Capital for the initial phase of the debt process, which was focused on refining the Nolans project debt financing strategy, targeting ECAs and lender engagement.
Then in April 2022, Arafura appointed Societe Generale (SG) and National Australia Bank (NAB) as the initial mandated lead arrangers (IMLAs) on the project. The two initial MLAs were engaged to arrange and syndicate a finance facility targeting debt funding of 60% of the estimated total development cost of the project. It was stated at the time that the MLAs would seek to arrange limited recourse debt finance of approximately $510 million (inclusive of cost overrun facility). That financing package was intended to comprise of: $150 million to be provided by the initial MLAs (on a best-efforts basis); export credit agency finance and, to the extent required, further financing through additional MLA bank(s) and/or via a syndication process.
London-based HCF International Advisers and Grant Thornton Australia are advising Arafura on the debt financing of the project and Arafura has appointed international law firm Ashurst as its legal counsel in respect of project financing.
On the equity front, the company said in March 2023 it had raised some A$141 million through several share placement schemes. In addition to this, the company was awarded grant funding of A$30 million under the federal government’s Modern Manufacturing Initiative which will contribute to the funding of the construction of its rare earth separation plant.
Arafura also has an agreement with Northern Australia Infrastructure Facility (NAIF) for a A$150 million facility, on a non-binding basis, for a 15-year term – this was recently increased from the initial A$100 million. NAIF has also advised Arafura that while the Nolans project has fulfilled the strategic assessment phase of the NAIF decision process, a final investment decision by NAIF can only be made following satisfactory due diligence and approval by the NAIF board.
Germany Inc steps up interest in Nolans rare earth project
The next big step occurred in January 2023 when Arafura appointed Germany’s KfW IPEX-Bank as an additional MLA and bookrunner to arrange and syndicate the debt financing facility. It will also act as the ECA structuring bank Bank “to advise Arafura on relevant contractual and structural elements relating to ECA-covered financing for the project and will manage ECA related workstreams through to financial close.”
KfW IPEX will work in conjunction with SG and NAB. Arafura also says that the mandate with KfW IPEX includes an indicative commitment to provide up to $75 million of commercial debt financing to the project in addition to the funding being sought with the initial MLAs.
Speaking on bringing KfW IPEX into the arranging group, Gavin Lockyer, managing director of Arafura Resources, stated: “The appointment of KfW to join the MLA group and provide ECA structuring advice represents an important milestone in the company’s progress on its project financing activities.”
He added: “The MLAs have significant international and domestic experience and a large global network, giving the company increasing confidence in executing its offtake and project funding strategy. The criticality of diversified supply chain security in the global push for energy transition shows strong alignment of the Nolans project with the mandates of project financiers and offtake partners alike.”
And as mentioned earlier, in March 2023 the non-binding agreement for $600 million was signed with Euler Hermes.
Speaking of this, MD Lockyer said: “We warmly welcome the support of Euler Hermes and ongoing engagement with EFA and NAIF. The Nolans project closely aligns with global customers’ critical raw material diversification plans and their ESG priorities. Support from Australian and international export credit agencies is a direct reflection of the value this represents. We look forward to close ongoing relationships with Euler Hermes, EFA and NAIF as we continue to progress offtake negotiations and the project moves through its next critical phases toward full funding, construction and first production.”
As ever, another key component of the project development is the securing of offtake agreements. And in a key development, and in a very timely fashion in early April 2023, Arafura Rare Earths signed an offtake agreement for NdPr from its Nolans rare earths project with Germany’s wind turbine manufacturer Siemens Gamesa Renewable Energy.
The offtake is a five-year agreement which can be extended by mutual agreement. Under this, Siemens will lift 200 tonnes of NdPr metal in 2026, increasing to 360 tonnes the following year before rising to 400 tonnes for the next three years from 2028. Siemens plans to use the NdPr metal to build permanent magnets used in offshore wind turbines assembled at its Cuxhaven production facility in Germany.
Lockyer commented: “We are delighted to have concluded negotiations for our second offtake agreement. Siemens Gamesa is the world’s leading manufacturer of offshore wind turbines, and this agreement compliments our strategy to create supply diversification into the renewable and E-mobility sectors.”
Arafura already has a binding offtake supply deal with South Korea’s motor manufacturers Hyundai Motor and its unit Kia Corporation. Under a binding agreement signed in November 2022, Arafura will supply contract quantities of NdPr over seven years that could increase up to 1,500 tonnes per year from the fourth year. Perhaps the obvious question here is: at what stage can we expect to see South Korean ECAs come in to support the Arafura Nolans project?
And in a further German-Australian development in early April 2023, the two countries signed a joint declaration of intent to create a new study, helping to establish new opportunities for critical minerals projects to meet climate and energy targets. The joint study will help Australia develop its industries around critical minerals such as extraction, refinement and recycling, while helping Germany secure reliable supplies of critical minerals to support its own manufacturing and recycling industries.
Australian Federal Minister for Resources and Northern Australia, Madeleine King, said: “Both Australia and Germany recognise the important opportunity we have to build diverse, resilient and sustainable critical minerals value chains. Both countries have complementary climate, energy and strategic ambitions. The Declaration of Intent with Germany will help us understand which critical minerals are most important to support Germany’s industries and how Australia can be a partner of choice in meeting these needs.”
Looking back to last year, when the previous federal government was in power in Australia, in March 2022, Keith Pitt, then the minister for resources and water commented: “Australia has been blessed with extraordinary reserves of the critical minerals needed. We produce around half the world’s lithium, are the second-largest producer of cobalt and the fourth-largest producer of rare earths. But we have the potential to do so much more. The Australian government is taking action to grow Australia into a critical minerals powerhouse, capitalising on the strength of our world-leading resources sector, expertise in processing and highly skilled workforce.”