A Rare Opportunity - (RBW)
3/12/2020
(119264)
A Rare Opportunity
Here we go again – another wildly speculative opportunity where the smart money has already made a killing, but where we might still be near the start of something remarkable. Hang on to your wallet, but toss a few quid this way in the hope that it could lead to something quite spectacular – or might just end in tears.
It makes sense to tag that nasty warning on the end. You never know. But the odds of a small gamble in Rainbow Rare Earths (RBW) turning out rather well look remarkably good. So for those prepared to live just a little bit dangerously, pile in. This could be real fun.
What follows is a grotesquely inadequate explanation of what is going on and where it might arrive. Sorry about that. This is one where you either lie down and let it pass, or leap aboard and hope you can grasp enough of the basics to ride along.
The clue is there in the Rare Earths part of the name. Rare earths are really not so rare, but finding them in sufficiently large retrievable quantities is difficult. Once extracted and put to use, they crop up all over the place, which is what makes them so interesting right now. China has long had a firm grip on the market, producing and using a large proportion of world output, maybe over 90%. Locating sufficient rare earths readily and safely accessible to the western world has become a growing concern – hence a hefty and continuing rise in the price of rare earths.
There are 17 chemical elements making up rare earths, with neodymium (Nd) and praseodymium (Pr) carrying the greatest element of value. They are vital elements in the manufacture of the permanent magnets which are used in turbines, motors, electric vehicles, and mobile phones, making them essential components almost everywhere in clean, green technology. Needless to say, demand is soaring and set to continue to soar at government and commercial level.
There are relatively few companies producing rare earths, with two small players of interest on the UK market – Rainbow and Mkanga (MKA). Mkanga looks interesting at 12p with a market capitalisation of £16m, but this report concentrates on Rainbow. At 10.6p it is capitalised at £40m, and this year has traded between 1.45p and 11.2p. It has almost doubled in recent weeks, and on November 25 announced it was raising £2.56m with a share issue at 6p. Those new shares started trading today (Thursday), and profit-taking took about 0.5p off the price, suggesting an impressive new list of firm holders.
That placing went to provide working capital, pay off some debts and to meet the initial $250,000 payment (of three) on a deal which will give Rainbow 70% (or thereabouts depending on results of a pre-feasibility study) of a joint venture with Bosveld Phosphates to develop jointly and process the Phalaborwa gypsum stacks in Limpopo province, South Africa.
Phalaborwa could be a sensational winner if all goes well. This was a hard rock foskorite and pyroxenite deposit mined over about 50 years, leaving a by-product of about 35m tonnes of gypsum deposited in two stacks. Put simply, these contain concentrations of rare earths with about 210,000 tonnes of Total Rare Earth Oxides, of which NdPr (the valuable stuff) is about 30% of the basket.
A pilot plant has produced about 3 tonnes of mixed rare earth carbonate at about 80% recoveries, which ought to be untroubled by low radioactive elements. It will leave clean gypsum which ought to be useful in the building and fertilizer industries.
All of the forecasts assume that the NdPr element of rare earth is in a strong bull market. Figures from broker UBS suggest that after an average NdPr price of $41kg for the past nine years, there will be a supply deficit by 2023 and a price of $100kg by 2024. That looks very conservative by some estimates.
It is possible to play about with the figures, and there can be no guarantees, but on those stated so far, it appears that Rainbow could have $2bn of NdPr at around current prices, capable perhaps of generating revenues of over $120m a year for well over a decade, plus revenues from other rare earths. House broker S P Angel reports Rainbow proposes treating some 2mtpa of gypsum for around 10,000tpa of mixed rare earth carbonate containing about 3,100t of NdPr equivalent metal oxide for around 17 years. With NdPr currently at over $65,560 tonne, that is staggering.
Last week, ushering in the fundraising, Rainbow chief executive George Bennett suggested demand for permanent magnet rare earths was poised for significant growth. A pre-feasibility study is under way and should be ready soon. He thinks the company will be able quickly to define the route to commercial production from Phalaborwa.
There is more, much more. Phalaborwa is a recent addition to Rainbow. It emerged on November 3. Prior to that, the company was focused on the Gakara project in Burundi. This is one of the world’s richest rare earth deposits, with high grades with Total Rare Earth Oxides in the range of 47% to 67% and an exploration target of 20,000 to 80,000 tonnes of vein material with upside potential as new veins are being uncovered. There is a high percentage of NdPr. It is considered a low risk, low cost operation with simple separation of the minerals from waste rock. There is a distribution agreement with thyssenkrupp Ra w Materials.
The need for further capital spending of $3.2m to advance Gakara has been reported. That would move towards raising production and revenues at Gakara substantially. Some of the recent funding will go towards advancing Gakara where there is work on a new mine plan and a move towards a much larger process plant which would transform the scale and operating base.
There is a useful but somewhat out of date presentation featuring Gakara from January this year at https://rainbowrareearths.com/wp-content/uploads/2019/10/Rainbow-indaba-2020-FINAL-for-website-v1.pdf
The Rainbow web site is out of date in places, but generally good at https://rainbowrareearths.com/
If you do try to check this one, go also to https://www.investegate.co.uk/rainbow-rare-earths--rbw-/rns/management-change-and-trading-update/201908280700043302K/
That marks the arrival of George Bennet t as chief executive officer in August 2019. His experience and enthusiasm are impressive, and he came long before Phalaborwa, but enthused about Gakara.
Phalaborwa is a massive step forward for Rainbow, and one which does not yet appear to have been fully absorbed by the market, although the shares have almost doubled since. The full ramifications take a little working out, and the conclusions are potentially staggering.
They are supported by the surge in interest in everything electric. The table in the January Rainbow presentation giving predictions about the rise in so many green sectors of business is remarkable, but will come as no surprise to anyone who reads the business pages. It is a revolution, but one where crucial elements – the rare earth elements – are in short supply and always under threat from China, the increasingly aggressive dominant producer and consumer. That makes the few rare earth producers in the west rather rare themselves.
Rainbow Rare Earth has been living on the edge so far, short of funds and scarcely taken seriously by the City. That is easy to understand. But times are changing rapidly, and if Gakara looked an increasingly interesting gamble, the Phalaborwa acquisition brings a transformation. No profits for a while, but enormous potential and appeal to major Western businesses looking for a reliable rare earth source away from China.
Some of the smart boys have spotted what is happening and helped inject life into the share price of late. But should there be a few short term profit takers allowing shares from the recent 6p funding to trickle into the market there might be an excellent buying opportunity in the morning (Friday). If not, never mind, Rainbow Rare Earths appears an outstanding gamble on the green revolution.
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