By Dr. Michael Green

Final results for the year ended 30th June 2019 have just been released by Rainbow Rare Earths, covering the first full year of production at the Gakara mine. In the period, a total of 850 tonnes of concentrate were sold at an average grade of 57% TREO, which represents a 126% improvement on the previous year. The numbers weren’t that brilliant, however there is plenty of good news in the statement which shows that RBW is eminently placed to benefit from the increase in demand for rare earths.

There is no doubt that the period represented a tough time for Rainbow as production was challenging with the rainy season giving rise to operational problems due to unsatisfactory equipment. This is being dealt with by the recent financing that has provided the funds to invest in a new mining fleet, which is on order. The adjusted EBITDA loss for the period came out at US$3.4 million, against a loss of US$2 million in the previous year. The net loss for the year was US$12.3 million, compared to a loss of US$2.6 million in 2017/18, which included impairment charges of US$3.9 million to cover the initial pits at Gasagwe and Murambi, and the plant at Kabezi, US$2.6 million of depreciation and the US$2.5 million cost of the Lind Convertible which was settled in June and July 2019.

Rainbow has a 90% stake in the Gakara Rare Earth Project in Burundi. This is an exceptional project which has some of the highest grades of REEs in the world at 47-67% TREO and is the only producer in Africa. Mining began in September 2017 and sales of REE concentrate commenced shortly after. Production is now being increased with the target of achieving breakeven profitability at the mine site level in February 2020, helped by the incoming CEO reducing costs by 50%, which will free up cash to develop the resource to its fuller potential.

In recent months there has been a change in management with the arrival of George Bennett as CEO who is spearheading a new strategy. George sees the past production as essentially representing trial mining. Production challenges have clearly demonstrated that more exploration is required to define the ore body which will allow a move to more mechanised mining. To date mining has involved winning the rare earth rich ore from high grade of varying thickness using manual methods, which limits the scalability of the project to match the likely true potential at Gakara.

It must be pointed out that the mining permit extends over an area of 39km² where so far more than 1,000 occurrences of rare earths have been discovered on the surface. As exploration work at the main Kiyenzi deposit has revealed, mineralisation has been found to exist between the high-grade veins. The trial mining has shown not only how easy the material is to dig but the success of relatively straight forward processing.

Already under the new CEO, changes in strategy has been initiated which should allow Rainbow to become the second largest rare earth mine outside of China. We caught up with George to understand how this will be achieved. Up until 2019, mining was just focused on the high-grade veins mining by hand, with all the other material treated as waste.

The plan is now to define a larger orebody to JORC standards and then develop a mining plan to extract a far larger quantity by mechanical means. An exploration programme is currently being developed which will allow the definition of a deposit which would provide for a 10-year life of mine producing 10,000t per annum of concentrate. The work on the resource is being handled by CSA Global, which worked on Lynas Corporation’s REE deposit in Australia, and an Inferred JORC Resource is expected to be available within the next six months, to be followed by a Feasibility Study. All of which could ultimately show that Gakara represents a much bigger target.

With mechanised mining will come the mining of lower grade material, but the team believe that a simple pre-concentrator step located at the mine site will save transporting unnecessarily large quantities of run of mine production to the mill, which lies 20km away from the mine. Test work is being carried out on the front-end processing circuit that will be required but it is likely to involve the addition of a scrubber, Dense Media Separator and spirals. This will all mean that additional funding will be required, but management is seeking to ensure that this can be financed in a way which limits dilution.

There are several important differentials between Gakara and other rare earth projects. Firstly, the mineralogy and metallurgy of the ore is simple with trial mining able to consistently produce a concentrate of 54-58% TREO, even from some lower-grade material that has been tested. By comparison, many other rare earth projects around the world require large and complex beneficiation steps and even then, cannot get concentrate grades anywhere like those achieved at Gakara.

Secondly, Rainbow’s project has negligible levels of uranium and thorium, a really important factor that is likely to attract rapidly increasing attention. Truth is that RBW’s ore is benign, which is a big advantage as in most global rare earth deposits, uranium and thorium are key elements that must be extracted requiring additional expensive steps in the processing which add huge opex and capex costs to any project. Rainbow has successfully exported rare earth concentrates to China which rigorously enforces strict limits on the level of radioactivity (less than 0.2µSv/hr, which roughly equates to background radiation in a granitic area).

The potential of rare earths provides plenty of reasons for optimism and, as we have seen, share prices in this sector can move quickly. It’s not long ago that shares in Rainbow Rare Earths were back above the 7p mark, but currently the stock has moved back to 2.63p. Align Research initiated coverage on Rainbow on 6^th June 2019 with a Conviction Buy stance and a target price of 10.53p, when the shares were trading at 6.20p. At the current price, our view remains unchanged.

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