| Arafura Resources Limited |


Rare earth metals are essential components of products with significant growth potential in the electronics industry, the delivery of energy efficiency and the management of greenhouse gas emissions. With products as diverse as re-chargeable batteries, magnets in electric motors, mobile telephones, laptop computers, and plasma screens relying on rare earths elements as key components, the market for rare earth products continues to grow strongly. The biggest growth market for rare earths is hybrid car market which is a major user of rechargeable batteries (lanthanum) and high strength magnets (neodymium). This market continues to grow as the economy looks for fuel efficient transport and a reduction of greenhouse gas pollutants. The large increase in the price of oil has also increased the demand for alternative technologies and thus, growth in demand for rare earths. Most major car manufacturers have aggressive expansion plans for hybrid cars that could replace 5% of the world's new car manufacture (or 3 million vehicles) by 2012. As a result of this and other increases in demand, total rare earth demand is forecast increase from its current level of 110,00 tpa by 70% to 180-190,000 tpa in 2012. While China has been the major supplier of rare earths for the last two decades it now realises that it can no longer fill this role without putting the sustainability of its domestic industry at risk. As a result, the mining, production and export of rare earths in China are now under strict control to ensure the long term viability of the closely related electronics manufacturing industries which are dependent on rare earths. The cut back in Chinese production is creating opportunities for non-Chinese rare earth projects.



Traditionally the demand for rare earths is divided into the following sectors: Catalysts (including petroleum cracking catalysts and autocatalysts, which consume lanthanum and cerium respectfully) Glass (cerium is the major constituent of this sector where it is employed as a decolourant; a demand that is falling as CRTs are replaced by LCDs and PDPs) Polishing (a rapidly growing sector that is based on the unique chemical and mechanical properties of cerium in the polishing of glass, including multi-level electronic components) Metal Alloys (where the demand for lanthanum nickel hydride batteries is the key driver of demand and could put pressure on lanthanum supply) Magnets (currently, the most dynamic market for rare earths with growth in demand increasing at >15% for the past 5-10 years, which have driven the prices for neodymium and terbium to increase by more than 40% over the past 12 months) Phosphors (necessary for the production of phosphors for TVs and enegy efficient lamps this the smallest sector by volume(6-8%), but the largest sector by value (30-35%) as europium and terbium are among the rare earths with the lowest abundance) Ceramics (yttrium stabilised zirconia, which is used throughout the resources industry where a material with high wear resistance is required, is the backbone of this sector) Other (this sector includes many applications from its use in the agriculture and textile industries in China to diagnostic equipment for the health industry) Throughout the 50 year history of the rare earths industry there has been an imbalance between the ratio in which the rare earths occur and the ratio in which they are consumed. This has varied from a shortage of cerium in the 1970s due to the demand for CRT televisions, to a shortage of europium in the 1980s for TV and fluorescent lights, to a severe shortage of neodymium in the 1990s and 2000s due to the demand for high strength magnets. However, the rapid increase in demand for neodymium still shows no sign of abating which means that rare earth ores that contain high levels of neodymium, such as Nolans, are at a premium; a situation that is likely to get worse (or better for Arafura!) over the next five years.



Looking forward to 2012, when consumption is forecast to be 180-190,000 tonnes, China will probably supply only 130-140,000 tonnes; sufficient to supply its own needs only. On this basis non-Chinese supply will need to be 40-50,000 tonnes if demand is to be satisfied; hence the Nolans Project is now viewed as an essential part of the supply matrix early next decade. The shortage is highlighted in the figure below:

As outlined above, the consumption of the individual rare earths that make up the total spectrum of demand is not in the same ratio as the mix in which they occur in the various deposits around the world. This is best illustrated by the figure below in which the relative abundance of the rare earths in the ‘new’ projects is compared with forecast demand in 2012. Nolans is well placed to take advantage of the high growth sectors of the market. The rare earths market in China is characterised by a high degree of fragmentation; the top 12-16 companies supply 80% of the market, which is home to 150-200 processors where the manufacturer of a given product can take place over four or more stages, each of which could be owned and operated by a separate company before it is sold to the final consumer. For example, consider the production of a rare earth magnetic powder for use in the production of bonded neodymium iron boron magnets. Company A will mine and beneficiate the rare earth ore to produce a rare earth mineral concentrate that is sold to Company B. This latter company utilises a chemical leaching process to produce light rare earth and medium/heavy rare earth chemical concentrates, usually as chlorides, carbonates or nitrates. Company C, who typically possesses separation facilities designed to process one or two types of chemical concentrate produces a range of rare earth chemicals (usually oxides) with a REO concentration of 99% from the mixed chemical concentrate. Company D purchases neodymium oxide which it reduces to neodymium metal in a carbon arc reduction furnace, which is sold to Company E who produces the rare earth magnetic powders. The production of a rare earth oxide for either a phosphor producer or an autocatalyst producer may go through a similar number of stages. It is Arafura’s intent that the Nolans Project will be a vertically integrated enterprise that will eliminate many of the inefficiencies of the fragmented supply chain in China.