Rainbow Rare Earths LON:RBW the Guernsey-based mining and exploration company focussed on the exploitation of rare earth minerals in Africa recently released a preliminary economic assessment of its flagship project, the Phalaborwa Rare Earths Project, located in South Africa.
Rare Earths minerals are a family of 15 soft metals in the lanthanoid series, as well as close cousins, scandium and yttrium. They are primarily used in technology applications – they are the ‘special sauce’ used in tablets and mobile phones, computer hard drives, electric and hybrid vehicles, and flat-screen monitors and televisions. They are also extensively used in the Defence sector, in lasers, radars, sonars, guidance systems. They are a very special sauce in that although by weight they are don’t make up a significant part of each component – without them the component wouldn’t work. For example, the amount rare earths used in magnets for computer spindles is tiny by volume, without them the spindle would not spin and the laptop would not work.
Rare earths aren’t actually all that ‘rare
To correct the assumption, rare earths aren’t actually all that ‘rare’ – in fact they are quite widely distributed around the earth’s crust – they are ‘rare’ in the odd etymological sense in that they are ‘hidden’ – namely they hide behind other metal and mineral deposits, so geologists have to play hidey-go-seek when looking for them as they could well be concealed by a big chunk of iron or tungsten. What makes them rare in the other sense of the word is that the metals – although numerous, cerium for example is more abundant than copper – they don’t show up very often in commercially exploitable quantities.
To date the most commercially-exploitable reserves of rare earth minerals are found in China, and as they are so critical for the technology the West is increasingly relying upon, this is a major bug-bear in both San Francisco and Washington D.C. Seventy-eight percent of all rare earth materials imported to the US between 2017 and 2020 originated in China, according to the US Geological Survey. China also produces more than 80% of the world’s total rare earth refined products—compounds of these metals that are easily processed further and have all sorts of uses. The rest of the world more or less relies on China for its supply of these materials, though the country is also the largest consumer of rare earth elements.
Strategic importance of rare earths
The strategic importance of rare earths has over the last decade sparked an exploration frenzy to find new non-China sources of rare earths in parts of the world where China doesn’t have influence. But like all good monopolists, the Chinese have also joined this ‘REE Rush’. To date, no significant alternative deposits have been discovered. Turkey caused a flutter of excitement back in July, as its minister of mines, Fatih Dönmez announced that the country’s geological survey had found vast quantities of rare earth minerals, However Dönmez was a bit vague as to what exactly the Turkish geologists had discovered and where. He did say that 694 million tonnes had been discovered – a deposit that would rival China.
However, contrary to the ‘Five Ws’ principle he failed to say where the deposit was found – commentators have lumped their money on the Kizilçaören deposit in the northwest of the country, a geological postcode that is already quite well-known; what was discovered – again geologists believe it is likely to be the less-valuable rare earths like lanthanum and cerium which already has a reasonably healthy global supply; when the deposit can be exploited – it might be a difficult to extract the minerals, and ultimately anything that would be extracted would have to be most-likely sent to China anyway, as the processing facilities needed to extract the minerals don’t exist in Turkey; and what impact mining would have on other economic activities in the area – farmers in that part of Turkey wouldn’t be too pleased with having their fields dug up, the water table polluted and big trucks driving through their apricot groves.
The Turkish discovery was quickly pooh-poohed by a semi-official Chinese source, which questioned the claims as to the potential size of the deposit, making the valid point that the 694 million tonnes quoted was likely to be the base rock deposit, not the rare earth mineral yield which would be significantly smaller. Since July it’s gone awfully quiet in Turkey on the discovery, presumably as the government opens discussion with a number of Chinese state-owned corporations on exclusivity, as part of that much-vaunted Belt and Road programme Turkey is part of.
Every few months, another geologist pops their head up from the hole they have dug in some far-flung corner of the world to announce the next big Rare Earth Elements find, which of course will take more exploration and equity capital to prove. Peru, Canada, Brazil, and Russia have all tried to get in on the act, but with lots of rhetoric and little substance.
And that’s why Rainbow Rare Earth’s progress is so interesting as the company actually has a deposit that it has been working on for a number of years and is making progress towards production. Obviously the company is looking for more money, stating in a presentation yesterday that it required USD295.5m of capital expenditure to exploit Phalaborwa, but this capex was: “significantly below that of a traditional hard rock rare earth mining project.”
But for their money, investors can expect Rainbow to process 2.2 million tonnes (mT) per annum of phosphogypsum over 14.2 years that will deliver 26,208 tonnes of separated magnet rare earth oxides at an average cost of USD33.86/kg.
Short turnaround
The presentation claimed: “This delivers an exceptional 75% EBITDA operating margin at the base case basket price of USD137.92 per kg, with first production assumed for 2026, established on near term forecasts well below both 2022 YTD average prices and long-term market forecasts.”
George Bennet, chief executive said on a call: “[Through this Preliminary Economic Assessment] we’ve been able to show that this is a very, very robust and strong project and is a breakthrough in terms of Rainbow as a company.”
He explained that on 2023 prices the Phalaborwa Rare Earths Project had a net present value of USD627m (GBP557m) with an IRR of 40%, an EBITDA operating margin of 75% and a payback of two years. However, he added, that using 2022 prices, the project would have an NPV of USD934m, an IRR of 51%, payback of 1.7 years and a margin of 81%. “That’s exceptionally good for a mining project,” Bennet said, “but I use the term ‘mining project’ loosely as we’re actually building a chemical processing plant.”
The Phalaborwa Rare Earths Project, located in South Africa, has an inferred mineral resource estimate of 30.7mT at 0.43% Total Rare Earth Oxides (TREO) contained within phosphogypsum in two unconsolidated stacks derived from historic phosphate hard rock mining. High value neodymium and praseodymium oxide, a critical building block for the global energy transition, represents 29.1% of the total contained rare earth oxides, with economic dysprosium and terbium oxide credits enhancing the overall value of the rare earth basket.
Bennet highlighted the fact that Rainbow was only one of two companies in the world that was taking its project all the way through to rare earth extraction as the company has developed its own IP and processes, “We have no mining, no milling, no crushing no floatation to produce a concentrate of rare earths which most projects have – but were going all the way to separation, which allows us to capture the full rare earth price [and…] helps us keep our opex and capex low [in comparison to other potential projects].”
The company is focussed on the rare earths that are linked to ‘the transition’ focussing on elements that are components of permanent magnets in electric vehicles and wind turbines: “…95% of our basket of minerals are four key elements used in the energy transition [Praseodymium (Pr), Neodymium (Nd), Terbium (Tb), Dysprosium (Dy)] and that’s why we are going to focus on just these elements to sell into a growing market that will have a supply deficit going forwards,” said Bennet.
Phalaborwa deposit has geological advantages
The Phalaborwa deposit has geological advantages against its peers, given that its deposits are laid down in Gypsum Stacks, as opposed to deposits found elsewhere in the world in Iconic Clays and Hard Rock. Gypsum Stacks also have the advantage of having very low deposits of uranium and thorium – both radioactive materials that need to be removed for safety reasons and dealt with separately.
“We’ve been very conservative with our numbers, and hope that the reality of pricing means that the project has significant upside as the price of minerals appreciates,” said Bennet,
“We are keeping our costs low as we don’t have the same processes as hard rock mining. […] Our project came from hard rock phosphate mining by the South African government next door. They found rare earths in their hard rock operations, as we’re building on work that has already been done.”
The company will extract its minerals through a continuous ion chromatography process, which is patented and proven processes. The work was initiated by Sasol through its own operations and partnered up with K-Tech a US company operating in numerous markets in biotech, chemicals and food technology globally.
Bennet said the next steps for the Phalaborwa Rare Earths Project is to go into a full feasibility study, updating the mineral resource and going through the permitting process. Once this is completed, Rainbow will be able to develop a pilot plant to: “give investors 100% satisfaction that this project is completely de-risked. We believe at Rainbow the project is de-risked, but I don’t expect you to take my word for it, so we’re going to prove it further.”
He added that the company was planning on building a pilot plant early in 2023. He said that some of the companies counterparties were encouraging the company to go into full production immediately, but “the pilot plant is part of the bankable feasibility study – this won’t slow down our aim to get into full production by 2026 – but will ensure that any gremlins are chased out of the system beforehand.”
Rainbow Rare Earths not looking to raise any capital
The company is not looking to raise any capital to kick off its feasibility study and not looking to raise any further capital this year, but will be raising capital to finance the construction of its pilot plant and this will likely be financed through debt, with an ultimate 70:30 debt-to-equity split for the full project.
The company is also exploring a high-grade rare earth mineral concentrate from large mineralised system in Burundi. The Gakara Rare Earth Project is one of the world’s richest rare earth deposits. Located in Western Burundi, approximately 20km south-southeast of Bujumbura, covering a combined area of approximately 135km², the project benefits from good infrastructure, with road links to Dar es Salaam, Tanzania and Mombasa, Kenya.
Rainbow was granted a mining licence in March 2015, which is valid for 25 years and renewable thereafter. Rainbow has a 90% interest in the Gakara Project with a non-dilutable 10% owned by the Burundi State. The mining permit covers a large area, over 39km². However, this project is currently stalled pending approval from the Burundi Minister of Mines. There has been some political upheaval in the country, which Bennet said following a cabinet reshuffle is moving toward resolution, but refused to put a time on how long the impasse would continue.Bennet added that the company was also looking at phosphogypsum deposits in Morocco.
The company listed in January 2017. Rainbow opened trading today at 12.85p and has offered a year-to-date return of -28.85% and a one-year return of -12.14%. Shares have ranged between 9.5p to 18.5p over a 52-week period.
The West has to develop downstream processing
“Look, what the Western world has to understand is that right now the Chinese control 90% to 95% of downstream processing, so that means even Mountain Pass, the biggest producer of rare earth concentrates in the Western hemisphere, send all their product to China,” Bennet said, “[The West] has to develop the downstream portion of processing. Even after we’ve produced a separated rare earth oxide – which is significantly further than most projects in the world right now – you still have to turn that into metal and alloys, which are fed into a manufacturing plant […] but there is very little capability in the West to process this material. By the time we’re into production, we believe that almost all the processing capacity will still be in China, who will buy every ounce we produce. We’d like to sell our strategic product to the West, but we’re a bit ahead of the curve right now.”
Valuation for Rainbow Rare Earth raised
SP Angel raised its valuation for Rainbow Rare Earth to 60p from 51p.
“We have revised our valuation to 60p from 51p to reflect today’s significant lift in value for the Phalaborwa project to USD627m,” said the broker in a research note.
The note stated: “We have applied a hefty discount to this to reflect the need to develop a full feasibility study for bank or other financing, though finance for critical REE materials is expected to come from multilateral and development funding groups.”
The broker also took note of the value of the Gakara project: “It’s not often that we say that the majors should sit up and take notice of a process technology, but then, it’s not so often that we get to see the demonstration of a new ‘breakthrough’ technology. Reunion Mining demonstrated the power of hydrometallurgical processing at the Skorpion zinc project in Namibia which was later bought and successfully developed by Anglo American. Rainbow’s technical director was also responsible for the Skorpion project process breakthrough at MDM Ferroman, the forerunner of MDM Engineering.”
The note concluded that the Rainbow process is: “calculably more valuable and strategically important”.
