By Dr, Michael Green

Rare earths are a sexy sector and share prices can move quickly. Over the past couple of months, the share price of Rainbow Rare Earths has been all over the place. News emanating from the US Senate has served to remind investors that these are critical metals. China’s dominant position in the supply and processing of rare earth elements (REEs) means that the country has a lever which could be applied to trade talks. Against this backdrop, the West needs to develop a non-Chinese supply of REEs and Rainbow may well have a role to play moving ahead.

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. Mining began in September 2017 and sales of REE concentrate began shortly after. Production is now being increased, with the target of achieving break-even in H1 2020 from two mining areas. In addition, there are two more pits where mining is about to start, thereby doubling the number of production areas in operation.

Yesterday afternoon’s announcement concerned an updated CPR by The MSA Group, which is on the website for all to see. The big takeaway is a 30% increase in Exploration Target tonnes. The consultants have taken a good long look at the company’s new plan to invest in the opening of additional mining areas employing better mining machinery and have endorsed Rainbow’s strategy. This CPR will form part of the forthcoming Prospectus which is needed as the company didn’t have sufficient headroom to grant all the shares that resulted from the last drawdown from Lind.

Importantly, MSA has increased its estimation of the high-grade rare earth vein tonnages classified by JORC as an Exploration Target from 20,000 – 80,000 tonnes at the time of the company’s IPO in January 2017. The Exploration Target is now 27,000 – 103,200 tonnes. So, MSA’s estimate shows a 30% increase at the mid-point of the range despite depletion from recent mined production. Investors might remember a maiden JORC resource announced a week before Christmas 2018. Well this seems to be the age-old story of two geologists never agreeing.  But the good news is that MSA believes, given some additional work, that its calculations for the Exploration Target could be translated into Resources.

MSA has specifically drawn attention to the high- grade deposits, where it suggests a number of areas will need further work. Firstly, more extensive use of laboratory testing of channel samples, rather than data from hand-held Niton XRF data. Rainbow has been using a Niton XRF analyser for a number of years and has tested 100s of channel samples with this machine. Secondly, additional computerised vein modelling is thought necessary. In addition, for the lower grade deposits such as Kiyenzi, MSA recommends a comprehensive laboratory sampling of all existing drill core from the 2018 drilling campaign plus additional drilling and metallurgical testing – which Rainbow already has planned over the coming months. All of this plus production reports offers investors the promises of a healthy newsflow.

Over the last 4-6 weeks there has been a firming of prices of these rare metals on the back of the all this renewed interest in REEs, with the NdPr price climbing some 25% higher, and there is a direct read across for Rainbow. Forecast demand growth for NdPr is largely driven by the anticipated uptake of electric vehicles (EVs) on the back of green legislation being adopted by the UK, India, Germany, France, Norway and China, as well as growth in all electric motor usage. Plus, Nd provides the power for smart phone to vibrate. In wind turbines, NdFeB magnets (an alloy of neodymium, iron and boron) have allowed for lower costs and improved efficiencies.

Rainbow has no problems selling all its concentrate. Demand is reported to be very strong from end customers secured by partner Thyssenkrupp under a 10-year offtake agreement for up to 5,000 tonnes per annum (tpa), plus first right of refusal on the next 5,000 tpa. In the future, there is the real prospect of becoming involved in the downstream processing of the concentrate, a move which could substantially boost margins. TechMet is in place to fund the DFS on such a facility. However, at this stage, any potential financier of such a project would need a guaranteed supply of feedstock. So, it is likely that the company would need to do some more work on the resource and to build up the tonnes in the ground. The big resource which was hit at Kiyenzi only came with the last ten holes of the drilling programme and further exploration work begs to be undertaken there.

It is not hard to see why Rainbow has been in the spotlight recently as the company represents just one of two quoted rare earth mining companies commercially producing REEs outside of China. The other, Lynas Corporation (ASX:LYC), capitalised at A$1.74 billion (£960 million), received an unsolicited bid in recent months.  Both these companies are truly independent from China and are set to benefit from significant growth in the market outside of the country. In our view, lowly valued Rainbow does look very well placed to benefit from the potential that China may move to curb exports to the US of REEs which represent essential components in numerous high-tech consumer electronics as well as military equipment.

Align Research initiated coverage on Rainbow on 6^th June 2019 with a Conviction Buy stance and a target price of 10.53p. At the current price of 4.30p, our view remains unchanged.

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Rainbow Rare Earths is a research client of Align Research.

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