Why is the Arafura share price surging 11% today?

Investors believe this rare earths developer could be a big winner from the Federal Budget.

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The Arafura Rare Earths Ltd (ASX: ARU) share price is having a strong session.

In fact, at one stage today, the rare earths developer's shares were up as much as 11% to 20.5 cents.

Its shares have eased back a touch since then but remain up 5.5% in afternoon trade.

Why is the Arafura share price zooming higher?

Investors have been fighting to get hold of the company's shares today in response to the Federal Budget.

The market appears to believe that Arafura Rare Earths will benefit from the government's target of making Australia a renewable energy superpower. This target includes the Government investing almost $9 billion over the decade into critical minerals supply chains. The Budget explains:

The Government is investing $8.8 billion over the decade to add more value to our resources and strengthen critical minerals supply chains. This Budget establishes a production tax incentive for processing and refining critical minerals at an estimated cost of $7 billion over the decade. It commits up to $1.2 billion in strategic critical minerals projects through the Critical Minerals Facility and the Northern Australia Infrastructure Facility, and pre‑feasibility studies for common user precincts.

Arafura Rare Earths is developing the Nolans Project, which is 135 kilometres north of Alice Springs in Australia's Northern Territory.

The company highlights that the cornerstone of the project is one of the world's largest undeveloped Neodymium and Praesodymium (NdPr) resources. With an initial mine life of 38 years and a valuable phosphoric acid by-product, it believes that Nolans will be a long life, low cost operation producing NdPr oxide. This is a critical component of rapidly growing global demand for electric vehicles and renewable energy technology.

Arafura Rare Earths may not be commencing production any time soon, but it already has binding offtake agreements in place. This includes with automakers Hyundai and Kia, and Siemens Gamesa Renewable Energy. In addition, the company has a memorandum of understanding in place with giant General Electric (NYSE: GE) and is progressing advanced negotiations with several prospective offtake partners.

The company has already been a winner from previous government funding. Earlier this year, it secured conditional Commonwealth Government approval for a debt financing package of US$533 million to progress the Nolans Project.

Commenting on that approval, CEO, Darryl Cuzzubbo, said:

Securing debt facilities of US$533 million from EFA and NAIF is a critical achievement for the Nolans Project and signifies its economic importance to Australia and the Northern Territory. "Gaining this level of support from the Commonwealth Government is a critical milestone in becoming a globally significant producer of NdPr, a product essential for electric vehicle and wind turbine manufacturers to achieve future growth targets as part of the energy transition.

Arafura Rare Earths has yet to comment on the Federal Budget.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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