Arafura Rare Earths (ASX:ARU) Nears FID With $1.35 Billion Secured- Time to Buy?

Arafura Rare Earths (ASX: ARU) presents one of the most puzzling setups on the ASX right now. The company has locked in over A$1.35 billion in sovereign-backed funding from the US, Canada, Germany, and Australia, yet shares trade around A$0.25, down sharply from the October high of A$0.62. For investors watching the critical minerals space, this disconnect raises a simple question: Is this a buying opportunity or a warning sign?

In our view, the answer depends on your time horizon. Patient investors willing to hold through the Final Investment Decision (FID) may find current prices attractive. But there are real risks worth understanding first.

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Why Four Governments Are Betting on Arafura

The Nolans Project stands out as Australia’s first fully integrated ore-to-oxide rare earth operation. Located 135 kilometres north of Alice Springs, it will produce 4,440 tonnes of NdPr oxide annually over a 38-year mine life, supplying roughly 4% of global demand for the magnet materials used in EVs and wind turbines.

What makes Arafura unique is its funding structure. US EXIM has signalled up to US$300 million in potential financing. Export Development Canada has committed US$300 million in senior debt. Germany’s Euler Hermes has conditionally approved US$115 million in loan guarantees. Australia’s NAIF has pledged A$200 million, with the National Reconstruction Fund adding A$200 million in equity.

This level of coordination between allied nations is unmatched. These governments are effectively betting that Arafura can help break China’s stranglehold on rare earth supply. Binding offtake agreements with Hyundai, Kia, and Siemens Gamesa, covering 66% of planned production, add further credibility to the project.

The Real Reason Shares Are Under Pressure

So why the weak share price? The reason is straightforward: dilution.

In October 2025, Arafura completed a A$475 million institutional placement at A$0.28 per share, led by Hancock Prospecting. This created approximately 1.7 billion new shares, diluting existing shareholders by 35-40%. Despite Gina Rinehart’s backing, shares dropped 23% after the announcement.

For many retail investors, the maths of dilution outweighed confidence from the funding success. The stock faced further pressure as the retail Share Purchase Plan saw low participation, raising only A$7.1 million. However, the completion of this ‘cleansing’ phase means the massive A$475 million capital injection is now fully banked, leaving the company with its cleanest balance sheet in years.

There’s a silver lining, though. On December 15, company directors took up their full entitlements in the Share Purchase Plan (SPP) at A$0.28, notably paying a premium of approximately 30% over the market price at the time to signal their long-term conviction.

The Investor’s Takeaway

The Bull Case: Arafura has moved from “survival” to “execution”. With the A$475 million raise complete, the company has its strongest cash balance ever. The recent bounce to A$0.25 from A$0.21 suggests the “dilution floor” is finally set. Some analysts recently upgraded the stock to a speculative buy and raised consensus price targets towards the A$0.35 range.

The Bear Case: Challenges remain before the Q1 2026 Final Investment Decision (FID). Arafura must still convert the US EXIM Letter of Interest into a binding commitment and navigate a volatile rare earths pricing environment.

Our View: We believe Arafura is now a safer investment for long-term growth. The strongest signal is company directors purchasing shares at A$0.28, a premium to where the stock was trading that week, which had dipped as low as A$0.21.

The key catalyst to watch is when EXIM’s Letter of Interest converts to a binding commitment. That’s when the risk-reward shifts decisively.