Quarterly Activities Report

and Appendix

5B

For the period

ending 30 September

2015

ASX: ARU

HIGHLIGHTS

Testwork demonstrates removal of all cerium in the RE Intermediate Plant, presenting an opportunity for lower capital expenditure for the RE Separation Plant

Independent engineering report identifies significant opportunities for capital expenditure savings

EIS on track for submission in Q1 CY2016 as flora, fauna and archaeology surveys and reports are being advanced

Nolans Community and Stakeholder Engagement program underway in Central Australia

Implementation of strategies to preserve cash reserves and manage Project advancement

Cash balance at end of reporting period A$13.5 million

NOLANS PROJECT

RARE EARTH EXTRACTION PROGRAM

One of the significant optimisation opportunities examined in the Company's Australia‐based rare earth ('RE') extraction program has been in separating cerium ('Ce') from the other REs in intermediate stage processing. Recent work shows all Ce will now report as a Ce carbonate product at the RE Intermediate Plant, eliminating the need to process Ce in the downstream RE Separation Plant. In the current Q2 FY2016, Arafura is conducting a detailed review of capital expenditure for the Nolans Project (see Engineering section below), including re‐estimating the capital requirement for the offshore RE Separation Plant to account for reduced processing volumes resulting from Ce removal.

The China‐based Stage 1 flowsheet optimisation program with two Beijing institutes has been completed.

During the quarter the Company and one of the institutes convened a workshop to discuss results and to assess flowsheet development opportunities arising from the use of an alternative reagent to sulphuric acid in the RE extraction pre‐leach circuit, which appeared to work very efficiently with the Nolans concentrate. The Company understands a number of established Chinese producers have been testing this alternative reagent as a substitute for sulphuric acid.

+ See chapter 19 for defined terms.

Quarterly Activities Report and Appendix 5B - 30 September 2015

Page 1 of 15

There is the potential this alternative reagent may result in a simplified flowsheet and consequently lower capital and operating expenditure for the RE Intermediate Plant area. The Company has completed a focused testwork program in Australia to better understand this pre‐ leach opportunity and to test the downstream acid bake options for the flowsheet. However, the Company has decided that due to the advanced nature of its work using the known sulphuric acid pre‐leach ('SAPL') flowsheet, it will not continue investigations into the alternative reagent at this stage. Arafura's testwork is being documented for future reference in the event an appropriate industry partner is interested in examining this opportunity under a mutually acceptable development arrangement.

Flowsheet optimisation testwork with the second Beijing institute was also completed during the quarter. The Company has recently received the final report from this institute. In October the institute conducted a workshop to provide the Company with a better understanding of the optimisation opportunities being targeted. In Q2 FY 2016 the Company will further analyse these results to determine if further work beyond Stage 1 with this institute is warranted..

BENEFICIATION OPTIMISATION STAGE 2 & VARIABILITY TESTWORK

The Chengdu Analytical and Testing Centre for Minerals and Rocks ('CTC') completed the beneficiation variability test program during the period. A draft report is in review; however additional testwork data will be incorporated before the report is finalised. The Company has decided not to progress to Stage 3 beneficiation testwork / integrated pilot plant ('IPP') immediately. The reasons for this are discussed in greater detail below (see Corporate ‐ Project Focus section).

ENGINEERING

During the quarter Arafura commissioned an independent engineering analysis of the Nolans Project to review the beneficiation and RE extraction flowsheets for capital expenditure savings and to examine various alternative production options. This process included a review of individual equipment costs, waste treatment facilities, infrastructure and a high level examination of plant layout. The results of this analysis are being used in the current December 2016 quarter to support a detailed examination of engineering cost reduction opportunities for both the Nolans Site and the offshore RE Separation Plant.

The Company looks forward to providing updates on these activities during the current quarter.

REGULATORY APPROVALS - ENVIRONMENTAL IMPACT STATEMENT STUDIES

Several Environmental Impact Statement ('EIS') studies, analysis and draft reporting were advanced during the September quarter.

Field work for flora and archaeology were completed, with draft reports in review. A draft fauna study report is in preparation and is expected to be received during October.

+ See chapter 19 for defined terms.

Quarterly Activities Report and Appendix 5B - 30 September 2015

Page 2 of 15

Images 1 and 2: Biodiversity survey activities at the Nolans Site.

Work on the establishment of additional baseline monitoring stations for radiation and dust was completed during the reporting period. The analysis of testwork aimed at measuring radioactive gas emissions from mineralised and waste rock types is at an advanced stage.

Image 3 (left): Air quality sampling station at the Nolans Site. Image 4 (right): Radioactive gas emission testwork on mineralised and waste rock samples being completed offsite.

Work continues on the consolidation of all analytical and monitoring data for the final report for the Southern Basins. Modelling of the data shows that the bore field aquifer system is very robust, the extraction of groundwater for the proposed mining and processing operations will have only minor localised impacts during operations, and the long term impacts on the aquifer system are anticipated to be minimal.

Image 5: Rising stage sampler installed at the Nolans Site for the collection of water samples from an ephemeral creek.

+ See chapter 19 for defined terms.

Quarterly Activities Report and Appendix 5B - 30 September 2015

Page 3 of 15

Geochemical analysis work has commenced to characterise and predictably model un‐mineralised waste rocks from the proposed Nolans mining operation to better understand the short and long‐ term risks associated with placement of large quantities of waste rock into waste rock dumps. This information will be a key input for the EIS.

COMMUNITY AND STAKEHOLDER ENGAGEMENT

During the period Arafura provided an update on the Nolans Project to the Anmatjere Local Authority of the Central Desert Regional Council in Ti Tree, and to participants at the Mining the Territory Conference in Darwin. In addition, the Company established an access portal for the Nolans Project using the Industry Capability Network ('ICN') Gateway. A large focus of stakeholder engagement has been on the impact footprint of the proposed development and on the benefits to the community, in particular employment and opportunities for local businesses.

EXPLORATION

AILERON - REYNOLDS (Rare Earths; Water; Extractive Minerals)

NOLANS REVISED RESOURCE STATEMENT

During the quarter work on a revised estimate of Mineral Resources for the Nolans Project was advanced, and is expected to be reported during the December quarter. The Nolans Bore block model now incorporates waste rocks whose detailed modelling was necessary to advance their geochemical and geotechnical characterisation as part of the EIS.

CARBONATE RESOURCES EMEL 30510

Reconnaissance mapping of the carbonate area has been completed on EMEL 30510. Prospecting in the southern end of the EMEL demonstrated good outcrops of quality carbonate (marble) beneath a veneer of calcrete and alluvium. Work to date indicates this area has the potential to supply the life of mine carbonate requirements for the RE Intermediate Plant. Trenching of this target area will be undertaken during the next six months.

YALYIRIMBI (Iron)

Ferrowest Limited ('Ferrowest'; ASX: FWL) and the Company recently entered into a Deed of Cancellation in respect of all future Ferrowest iron ore rights in the Yalyirimbi Iron Project on EL 24548. The Company is the owner of the underlying mineral tenement, and iron rights are held through Arafura Iron Pty Ltd ('AIPL'). The Deed of Cancellation was executed in September and unwinds Ferrowest's participation in Yalyirimbi and results in the following:

• Transfer of the 51% of the shares in AIPL held by Ferrowest back to the Company. AIPL now being a wholly owned subsidiary of the Company;

  
  

• Resignation of the two Ferrowest nominated directors from the AIPL Board;

+ See chapter 19 for defined terms.

Quarterly Activities Report and Appendix 5B - 30 September 2015

Page 4 of 15