Rainbow Rare Earths: Ready for a Sweep

Rainbow Rate Earths debuted on the London Stock Exchange this week, raising 6.4 million pounds (US$8 million) through the initial sale of its common stock.  The stock trades under the symbol RBW.  The capital infusion is intended for the company’s Gakara Project in Burundi, East Africa where Rainbow plans to mine rare earth elements.  The offering brings total shares to 152 million.  The stock closed down at GBP11.125  (US$8.81) per share on the first day of trading.

It takes plenty of tenacity to explore and develop a rare earth asset.  A good dose of courage is needed to bring that operation to the public equity market.  Recent years have been challenging for the rare earth sector:  low selling prices, illegal supplies, industry corruption.

Few industry experts expect much improvement in 2017.  Selling prices for rare earth materials have been under considerable pressure from strong supply from China, which dominates the rare earths market.  Political corruption scandals that ensnared the top rare earth mining companies in China and one of top producers remained closed for most of 2016.  While world supplies of rare earths were reduced as a consequence, it seems to have only modest impact on world prices.

China produces as much as 90% of rare earth materials used domestically and around the world.  That makes China policies of critical importance to the entire sector.  In October 2016, China’s Ministry of Industry and Information announced plans to limit rare earth mineral production to 140,000 tons by 2020.  There has been an attempt to crack down on illegal mines and prosecute public officials involved in illegal mining schemes.  There had been estimates that illegal mines had dumped as much as 45,000 tons of rare earths annually onto the world markets, representing about 30% of total annual supply. Eliminating illegal mines could leave some room for new suppliers outside China.

With new sources of demand coming along, industry research firm Research and Markets estimates that the rare earths market could exceed $40 billion by 2022.  Rainbow Rare Earths would like to get a piece of the pie.

Rainbow’s Gakara Project in Burundi has the potential to yield 20,000 to 80,000 tons of ore containing high yields of rare earths.  The company is ready to begin producing as much as 3,900 tons of concentrate during an initial two-year trial phase that is expected to begin yet this year.  Eventually, the company plans to crease its processing rate to 5,000 tons per year.

Management thinks they have a winning formula in the Gakara Project.  Plans include manual extraction from hillsides without the use of explosives.  Then a chemical-free, gravity separation process will be used to sort out the waste rocks.  The estimate for the plant infrastructure is around US$2.2 million with a nine-month time to completion.  Since all permits are in place, the new infusion of allows management to execute on plans immediately.  Rainbow estimates operating costs could be $103,000 per month in the first year of test operations.

Gakara is expected to yield a mix of rare earths, including lanthanum, cerium, praseodymium and neodyminum, among others.  Neodymium and praseodymium are the strongest commercially available magnet materials.  These rare earths are used in electric motors and generators that end up in electric and hybrid vehicles and wind turbines among other uses.  About 20% of production is rare earths suitable for magnets. 

Rainbow has secured a 10-year off-take and distribution agreement with Thyssenkrupp Rare Materials.  Thyssenkrupp is a well established metals distributor with customers in Europe, the Americas and China.  The off-take agreement gives Thyssenkrupp exclusive rights to the first 5,000 tons produced at Gakara each year and a right of refusal as much as 5,000 additional tons per year.

Investors in the U.S. have just come off the colossal failure of rare earth developer Molycorp, which was a victim of rapidly eroding prices for rare earth materials as China flooded the world market over the last few years.  With the help of a private equity fund, the company exited bankruptcy in August 2016, and took on the new name Neo Performance Materials.  However, its rare earths mine and processing facility in Mountain Pass, Colorado owned by Molycorp remained in a separate bankruptcy while a buyer is sought.

As the saying goes, ‘once burned, twice shy’ and it would be understandable if U.S. investors chose to take a pass on Britain’s latest rare earth investment opportunity.  Granted Rainbow will have no special shelter from the competitive threats presented by established and influential producers in China.  What does set the company apart is the low-cost structure of its plans both in terms of the capital requirement and operating budget.  The modest price tag could be Rainbow’s salvation when the competition decides to run a ‘sweep’ across the rare earths playing field.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.