Many thanks for highlighting Rainbow Rare Earths
Interesting both from the aspect of the potential for the rare earth metals in the modern world and also as this micro-cap would seem to be at an early pivotal point in its development.
The macro argument that there is going to be increasing demand for these metals which are not actually rare but are difficult to extract economically is convincing. Electric vehicles, batteries and motors, wind turbines, drones and robots all need these metals and would seem to be the way things are going.
It is also interesting to note that China controls 90-95% of their production and US and China trade wars worry the market.
China is the major producer of these metals for a reason. They can extract them at less cost because environmental and other concerns are currently not a priority in China. This I believe will change but perhaps not for some time.
However China’s position is probably not as great a risk as the market seems to think as this article in Scientific American proposes:https://www.scientificamerican.com/arti ... -elements/
However the market is not always rational and market perceived risk will push up the price of these metals.
Rare earth metal are currently near a 10 year low. The underlying pressure should be upwards.
At the weekend I listened to a Piworld interview by David Stevenson and his approach to investing.https://www.piworld.co.uk/2020/06/05/pi ... investing/
I highlight it not because I particularly agree with him but because he did strongly advocate coming out of energy investing and in particular avoiding gas and oil as it was ‘doomed’ (or words to that effect).
Eventually this may well be the case but I suspect he is a little premature but if you believe him rare earth metals will be needed as part of the transition to renewables.
The future for these rare earth metals looks bright but the big question is how far in the future?
Turning to Rainbow Rare Earths
who own licences in Africa that are rich in these metals.
They are course are keen to point out how rich their main resource at Gakara is:https://www.miningreview.com/top-storie ... hs-gakara/
Despite this they have not been able to produce from this mine at a profit from day one in 2017.
Here are updates in July 2018 and December 2019https://roskill.com/news/rare-earths-ra ... m-burundi/
https://www.proactiveinvestors.co.uk/co ... 04478.html
The ramp up in production at Gakara has increased the cost of production from US$2,315/t in Q1 to US$2,534/t in Q2. Including cost of sales (US$517/t) and a declining realised sales price (US$2,229/t), results in a loss of US$822/t on produced concentrate for Rainbow during the second quarter.
Revenue for the year to June was US$1.5mln, a 35% growth y-o-y, while adjusted underlying loss was US$3.3mln, a 39% contraction y-o-y, as the firm encountered operating problems during the rainy season. Net losses were US$12.3mln.
In the recent placing:https://www.investegate.co.uk/rainbow-r ... 51336956Q/
It is stated:
To date, Rainbow has produced and shipped 1,600 tonnes of high-grade concentrate from the Gakara Project with an average grade of 57% total rare earth oxides of which over 19% represents high value Neodymium and Praseodymium oxide used for the manufacture of permanent magnets.
Which is true but this production has been at a loss.
However changes have at last been made.
This started with a change in management late last year: https://www.investegate.co.uk/rainbow-r ... 00043302K/
The appointment of George Bennett to the Board as Chief Executive Officer, with immediate effect.
The interim results from March 2020 were honest:https://www.investegate.co.uk/rainbow-r ... 00079482H/
Fall in production reflected the operational challenges at Gakara that had been experienced since late 2018, and which has led to a revision to the operating strategy in the period.
Achieving break-even profitability at production level represents a considerable downgrading of expectations from the existing production set-up, however reflects a realistic assessment of the productive capacities of current operations.
The mining of ore since the commencement of operations at the mine in early 2017 had consisted of the extraction of almost pure vein materials using hand tools, with the removal of waste being undertaken using a small fleet of largely rented mining equipment.
Tonnages of ore mined declined from the advent of the rainy season in September 2018, despite two pits being operated in parallel, and highlighted the limitations of this initial approach.
In particular, the rented equipment struggled to perform in wet conditions, resulting in significant periods of downtime following each rain event. In addition, the lack of geological information on the ore-body meant that ore tonnages were unpredictable, with veins seen at surface pinching and swelling, or even proving discontinuous, as mining descended.
So now haul trucks have been purchased and rented vehicles reduced to 6. An excavator, grader and TLBs were added to the fleet.
As a result, the total ore tonnage mined in the period increased to 3,900 tonnes (compared with 580 tonnes in the six months to 30 June 2019), albeit at much lower grades (typically between below 5%).
Production levels cannot be stated with certainty, however once a mine plan has been drawn up, based on reliable geological data, and utilising the new mining equipment, concentrate production is expected to increase to more than 100 tonnes per month, which is expected to cover the production costs following recent cost saving measures.
The near-term production strategy seeks to satisfy the Company's in-country social obligations, thus keeping the mining permit in good order, while eliminating production losses as soon as practicable.
However, the ultimate strategy of the Company remains the design of a much larger operation, capable of producing in excess of 20k tonnes of concentrate at 54% TREO per annum for at least 10 years (ideally up to 20 years or more).
As they sell the ore unprocessed there is a considerable price to pay:http://rainbowrareearths.com/wp-content ... .03.19.pdf
And then we negotiate, with the customers, a discount to reflect the fact that the material needs processing. So, it’s very simple to get from the basket price to the selling price. And we have announced that roughly 70% is the discount we negotiate with customers, which is why our $11,500 per tonne, or $11.5 per kilo, comes down to roughly $2,000 a tonne that we sell.
However plans are afoot to address this:
We announced, in August, our partnership with TechMet. And over the last six months or so, since we’ve been working with the, we’ve been pleased at the progress it’s made. We’ve conducted a scoping study to review technologies available to us first for processing our ore. And then we intend to move on to the full definitive feasibility study, which TechMet will fund, to fully calculate the economics of moving into building our own plant for separation of our ore, or further processing and then potentially separation, to sell a much higher value product.
So, if we catch some or all of that 70%, the economics could be extremely attractive.
The Bull case is:
1. Increasing demand as we move from carbon based fuels.
2. Market paranoia regarding China’s dominance in the rare earth market.
3. RBW own licences on an extremely rich source.
4. Management at RBW has a better focused strategy to deliver value from their assets.
5. Directors have bought in at a significant level at a recent placement that was at a slight premium to the share price. Putting money where their mouth is.
6. A revised JORC resource classification is imminent (weeks) and this is likely to upgrade the potential.
The Bear case:
1. Realistically significant production is some way off even if all goes to plan.
2. They are currently loss making with interims to December 2019 stating - ‘Total loss after tax was US$1.9 million’.
3. A loan of $1m US dollars in February 2020 has had its repayment extended until December 2021 and ‘It is intended that the loan be repaid out of the proceeds of a future fund-raise’ .
4. After the recent placement I calculate they have around $2m in cash about the same as the 6 month loss to December 2019.
5. There is bound to be a future fund-raise both to pay off the debt and finance their future developments.
I do believe the imminent JORC will be positive and there will be some uplift from the recent placement price of 3p. However I don’t believe this will be sustained and the share price is likely to slip back again in the coming months.
In the end if management can fulfill its strategy there could be a decent re-rating but I think we are talking years not week or months.