Arafura continues falling. Buy the dip or switch out?

Arafura shareholders' suffering continues.

Arafura (ASX: ARU) closed at about 18 cents yesterday, down roughly 43% from its May highs of 31 cents. It is also more than 30% below the 26-cent placement price at which Gina Rinehart’s Hancock Prospecting invested $85 million.

The fall says something important about what the market thinks the rare earth boom is worth.

The September Trump-Xi summit extended the US-China trade truce, which has eased immediate fears of further Chinese restrictions on rare earth exports.

At the same time, investors are looking ahead to the harder part of Arafura’s story: building a $1.9 billion mine and refinery in central Australia.

Nolans is targeting first production in 2029. But investors know large greenfield projects can suffer delays, overruns and other problems. Lynas and MP Materials both experienced this.

That leaves shareholders with a simple question: how much of the current share price is already discounting weaker neodymium and praseodymium prices ("NdPr", two elements essential for electric cars and military tech), and execution risk?

Is Arafura cheap?

Arafura is currently trading on a market cap only modestly above the size of its cash pile, as Kerry Sun highlighted in an excellent article recently. This may create the impression that Arafura is cheap. But there's more to the picture.

Arafura has one major asset: Nolans Project, which it wholly owns. 

Nolans, which sits about two hours north of Alice Springs, is extremely sensitive to NdPr prices. According to the company, Nolans' sensitivity to NdPr prices is such that any US$10/kg change in NdPr prices moves the value of Nolans (NPV) by US$260 million.

That means determining whether Arafura is cheap is perhaps best done by seeing what NdPr price the stock is embedding. 

On Barrenjoey's numbers (above), Arafura is embedding NdPr prices pretty close to prevailing spot prices. Which argues against any rushed conclusions that Arafura is a clear cut cheap dip buying opportunity. 

Adding to this, investors have reasons to prefer investing in MP Materials and Lynas due to differences in support. 

MP Materials is supported by the US Department of Defense, which provides a 10-year price floor of US$110/kg for its NdPr products. Lynas has agreed a US$110/kg floor for its NdPr sales to Japan.

Arafura has government support, but less clear cut. The Australian Government has made a non-binding commitment to take 500 tonnes a year of Nolans rare earths for five years. That is just 11% of Nolans’ planned 4,440 tonnes of annual NdPr production.

Indeed, if we look at what the AFR published as Gina Rinehart's listed mining portfolio, we can see she has quite a bit more invested in Lynas and MP. 

What should rare earth investors do?

Investors attracted to rare earth producers ex-China face a small universe.

Lynas (ASX: LYC), Serra Verde (USA Rare Earths) and MP Materials are the only established producers. Outside these companies, the listed universe quickly becomes a collection of smaller earlier-stage projects.

For this reason, we haven’t seen – and are some way off seeing – any pure play rare earth mining ETFs listed on the ASX.

Copper: another way to trade the theme?

For investors specifically seeking NdPr exposure, Arafura remains a highly leveraged way to express that view.

But for investors wanting access to the same broad themes with less volatility - electrification, defence tech and supply-chain security - copper may be an alternative. 

Copper has its own risks, for sure. It is near record highs, held up more by US tariff policy than supply and demand fundamentals per se. But for longer-term investors who want less single-project risk, copper provides a deeper and more liquid market.

Rare earths remain strategically important. But as China-US tensions thaw, investors need to ask whether they are making a geopolitical wager or betting on the underlying commodity.

Copper miners ETF

For investors wanting diversified exposure to copper miners, the ETFS Global Pure Play Copper Miners ETF (ASX: CPPR) launched in April this year with a management fee of 0.39%.