MELBOURNE, May 21 (Reuters) - Arafura Rare Earths ( ARAFF ) said on Thursday it approved the development of its $1.6 billion Nolans project in Australia's Northern Territory, which is set to be the country's third-biggest rare earths operation by the end of the decade.

Shares of the company rose as much as 13.6% to A$0.335 in their best intraday gain since March 11. The benchmark stock index was up 0.9%, as of 0215 GMT.

Arafura secured financing commitments from the export credit agencies of the United States, Canada, Germany and South Korea, alongside global trading houses and manufacturers as Western countries step up efforts to diversify away from dominant rare earths producer China.

Arafura will supply South Korean automakers Hyundai and Kia, Germany's Siemens Gamesa RE, and commodity trader Traxys' Luxembourg and U.S. units.

Construction on the project, which has been in the making since the deposit was discovered three decades ago, will begin in September, with first production expected from mid-2029.

Arafura secured a $1.6 billion funding package including a significant buffer and is backed by Australia's richest person, Gina Rinehart, whose Hancock Prospecting owns a 15.5% stake.

The Nolans project is designed to deliver 4,440 metric tons of neodymium-praseodymium (NdPr) oxide annually, targeting markets outside China amid growing demand for rare earths used in electric vehicles and wind turbines.

The size would make it Australia's third-biggest operation after Lynas Rare Earths, the world's largest producer outside China, which produced 6,600 metric tons in the last financial year, and Iluka, which has 5,500 tons of NdPr capacity and is expected to start next year.

Australia is pushing to be the top supplier of rare earths to its allies, and Arafura is slated to supply 500 tons of NdPr to the country's strategic minerals reserve, which is set to be up and running by year-end.

Arafura said engineering contractor Hatch has been engaged to support development.

The final investment decision came after a multi-year financing and offtake strategy.

($1 = 1.3988 Australian dollars)