The Arafura Rare Earths Ltd (ASX: ARU) share price suffered an 11% decline last month. Shares in the rare earth project developer clocked a new 52-week low as the company lost favour among its investors.
August marked the seventh consecutive month of decline in the share price of the rare earth mining hopeful. The continued weakness means Arafura shares are now 37% worse off since the end of 2022 — backtracking to a market capitalisation of $591 million.
So, why were investors continuing to dump their Arafura holdings last month?
Live by the sword, die by the sword
Strangely enough, despite the noteworthy move, no price-sensitive announcements were published by Arafura during August. The only substantial document to be released last month was the company's 2023 annual report.
At 102 pages, it's challenging to establish which information may have left a sour taste. However, the 7.6% slump in the Arafura share price on the day of its release would suggest something within did not sit well with shareholders.
It's possible the market was not fond of Arafura sticking with its base case and upside case estimates for the Nolans project.
As outlined, the base case is built on an average life of mine Neodymium Praseodymium (NdPr) price of US$130 per kilogram over 38 years. Meanwhile, the 'upside case' is calculated on an average price of US$190 per kilogram.
These assumed prices are well above current spot prices for rare earth oxides. Specifically, the base case price of US$130 is roughly 85% above the last quoted price for the critical mineral. Moreover, the upside case average is approximately 170% above recent spot prices.
The bullish figures could mean the projected returns are overstated if rare earth prices fail to reach the bullish estimates.
Investors in Chalice Mining Ltd (ASX: CHN) also found it hard to stomach lofty estimates used in its own scoping study released toward the end of the month. Shares in the precious and base metals project developer sank 25% after using commodity prices mostly above current levels in its study.
The reality is pre-production mining companies are often a proxy of the underlying commodity price. For better or worse, the share price is usually heavily influenced by the rare earth oxide price.
What else might have weighed on the Arafura share price?
An additional consideration for shareholders might have been the cash burn in FY2023.
Arafura raised $185 million from issuing new shares during the financial year. However, almost 40% of as much cash was consumed by operating activities in the 12-month period. The company finished up with $128.85 million in cash and cash equivalents on its balance sheet on 30 June 2023.
Given Arafura is still a ways away from production, investors might have been concerned about how much further dilution could still be ahead.
For reference, shareholders were diluted by ~23% during the past year.
