Arafura Resources : Quarterly Activities and Cashflow Report

ASX Announcement

Quarterly Activities Report and Appendix 5B

30 September 2017

Highlights

• Bulk pre-leach Phase 3 pilot program successfully completed
• First stage of Phase 4 pilot completed, batch paddle dryer equipment successfully demonstrates acid bake
• Mine planning establishes Nolans underpinned by a world-class NdPr resource which will support a mine life in excess of 30 years
• NdPr oxide price increases by 75% in the period from December to September 2017. Solid price rises stimulate investor interest in the sector
• NdPr supply deficit appears likely on the back of tightening China supply and incremental demand as the EV revolution gains momentum and China announces plans to move to a total EV fleet
• Cash position improved to $12.2 million at 30 September 2017, boosted by R&D rebate

Nolans Project

During the quarter Arafura completed Phase 3 bulk pre‐leach piloting for its 100 per cent‐owned Nolans Neodymium‐Praseodymium (NdPr) Project in the Northern Territory. The bulk pre‐leach pilot plant was run over a five‐day period during July at SGS Australia's Perth facilities. The broad objectives of the program were to demonstrate its technical and operational viability, to process all available high‐phosphate concentrate (HPC) to generate pre‐leach residue (PLR) for downstream piloting, and to obtain process and mechanical engineering design data for incorporation into the Nolans definitive feasibility study (DFS). A data package and final report detailing the all the process outcomes from the bulk pre‐leach is expected in the coming weeks.

The program also incorporated a small pilot of the phosphoric acid regeneration circuit to revisit the deportment of rare earths (RE) to gypsum waste. This pilot work was successful in demonstrating a

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24% reduction in the overall total rare earth oxide (TREO) losses to gypsum relative to the previous guidance of 4% (refer to ASX announcement 10 July 2017).

Piloting work was also completed by phosphoric acid experts Prayon Technologies (Prayon) in Belgium during the quarter to demonstrate the final step in Arafura's Phase 2 phosphate extraction process, the goal of which was to produce merchant grade phosphoric acid (MGA). Using a sample of dilute phosphoric acid from the Phase 2 pilot, Prayon successfully generated a good quality MGA product that is suitable for higher grade fertilizers such as diammonium phosphate (DAP).

The first stage of the Phase 4 pilot (acid bake) was successfully completed with advice and oversight from a representative of equipment vendor ANDRITZ Gouda. The tests were undertaken at a small scale (Figure 2) to evaluate the applicability of Gouda paddle dryer equipment for Arafura's acid bake process. The ANDRITZ Gouda representative concluded the paddle dryer would be appropriate to meet Arafura's piloting objectives.

Whilst confident in the success of the acid bake trials, the Company believes it to be prudent to expand the scope of Phase 4 piloting to:

• Gather further operational and design data;

• Provide the opportunity to test alternative equipment to diversify supplier reliance; and

• De‐risk future commissioning and operation of the extraction plant flow sheet.

Arafura now intends to demonstrate this process at a larger scale which will consume all of the PLR (two tonnes) generated in the Phase 3 pilot.

Phase 4 is now expected to be completed in the first quarter of 2018, with a final investment decision (FID) on development of the Nolans project still expected to be made by the end of 2018.

Each phase is operated on a continuous basis

During the quarter Arafura reached an agreement to extend the 2015 Memorandum of Understanding (MoU) with Korean multinational chemical manufacturer OCI Company Ltd (OCI) in regard to the development of a Rare Earths Separation Plant in South Korea.

Arafura's Nolans project in the Northern Territory consists of the units of operation for mining, beneficiation and extraction (see Figure 3). The MoU outlines both party's roles and responsibilities to negotiate definitive agreements for the creation of a special purpose vehicle for a Joint Venture (JV) Separation Plant, to toll process the mixed RE intermediate feedstock from Nolans.

Arafura and OCI will work together over the coming months to complete a number of technical and commercial arrangements to align their interests more closely ahead of negotiating the definitive agreements.

The MoU is non‐binding on both parties and expires at the earlier of December 2018 or the execution of an agreement formalising the JV.