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Rainbow Rare Earth Ltd

INTERVIEW: Rainbow Rare Earths Production Guidance for 2017-18

Rainbow Rare Earths Ltd (LON:RBW), the rare earth element mining company operating in East Africa, announced today its audited results for the 12 months ended 30 June 2017. CEO Martin Eales talks to DirectorsTalk about its interim’s. Martin reminds us what has been announced today, what has happened since 30th June, first sales in Q4 2017, production guidance and the potential of the company.

Highlights

· Completion of Placing and Admission to the London Stock Exchange Main Market raising gross proceeds of US$8 million (US$7.4 million net)

· Rapid development of the Company’s Gasagwe mining area focused on site preparation and waste stripping

· Construction and development of the processing plant site at Kabezi underway at year end ahead of commissioning in Q4 2017

· Commencement of ROM ore extraction at Gasagwe in September 2017

· First concentrate sales remain on track for Q4 2017

· Pricing for rare earth elements strengthened markedly during 2017, with Rainbow’s basket price as at 3 October 2017 up around 70% since the start of the year

· Rainbow provides first Production Guidance for 2017-18 of 3,000-4,000 tonnes of ROM ore mined generating 2,250-3,000 tonnes of mineral concentrate for sale

 

Production Guidance 2017-2018

Following the successful progress of Rainbow’s development of its first mining area at Gasagwe and with the processing plant at Kabezi, the Company is pleased to provide forward guidance for the current year ending 30 June 2018. ROM ore production is forecast to be in the range of 3,000-4,000 tonnes which is expected to generate 2,250-3,000 tonnes of mineral concentrate for sale.

The production figures estimated by MSA in the Competent Person’s Report contained in the Company’s Prospectus dated 25 January 2017 proposed that over 22 months Gasagwe might be capable of generating 3,338 tonnes of ROM ore and 2,503 tonnes of concentrate. Rainbow’s revised guidance compares extremely favourably to this estimate which encompasses a time period of only 14 months since first activities at Gasagwe or just over 9 months from the commencement of ore extraction.

The Company is currently assessing a number of different approaches to extraction of ROM ore which affect the contained level of dilution. Consequently there is a relatively large range in the ROM ore tonnage figure anticipated.

CHAIRMAN’S STATEMENT

When Rainbow first obtained its exploration permit for the Gakara rare earth deposit in 2011, we believed that the Company had something special and the potential to become one of the most important rare earth mines in the world. We had the desire to become Africa’s first operational rare earth mine.

Since then, we have come a long way, and the journey has been a rewarding one thus far, but not without its particular trials and tribulations. The challenges that we have endured have included a dramatic downturn in the price of rare earths and civil unrest within Burundi in 2015, all in the context of one of the longest bear markets to have faced the mining sector in living memory.

In spite of all this, we have remained unshaken in our confidence in the Gakara project for two principal reasons: first of all, we believe that the demand for rare earths is likely to increase over the coming years, in direct response to growth in usage of electric vehicle technology as well as in many new green technologies; and secondly, we believe in the deposit itself – the grades at Gakara, which have been independently estimated to be between 47-67%, are among the highest anywhere in the world, which in turn allows for cleaner, lower-cost mining techniques.

In the 12 months to 30 June 2017, the Company has been able to take a number of major steps in order to realise the potential of the mine.

The successful IPO, which completed in January 2017, raised a total of US$8 million, and transformed Rainbow into a public company with a Standard Segment listing on the main board of the London Stock Exchange. These funds are now being used to complete the construction of the mine and plant at Gakara, with the first shipment of concentrate still on track for Q4 2017 through our multinational distribution and offtake partner, thyssenkrupp Raw Materials.

We have also been able to put in place a team with the skills and experience, as well as the energy and drive, not only to complete the construction phase, but also to manage the project as it moves from construction into production. I would like to thank our CEO, Martin Eales, who has been instrumental in guiding the project through some of the toughest periods, for his endurance and leadership.

I would also like to thank my fellow Board members, all of whom are also shareholders, for their support in completing the fundraising, as well as for their guidance and advice in the ongoing running of the Company.

Without the support of our staff and communities in which we operate in Burundi, this project would go nowhere. I would like to thank them all for their enthusiasm and positive support of Rainbow. Ultimately we are guests in their country and we hope that we have a long and sustainable partnership with all the people of Burundi and that all of our work and effort yields a net positive result for all stakeholders.

At the time of writing, the construction phase nears completion, but the challenges are far from over, and we need to remain focussed on delivering the project on time and on budget. The fundamentals of both the Gakara project, and the rare earths market, if anything are even more exciting than when we first started this journey.

We look forwarding to delivering to you regular updates on our project as we achieve the various milestones we have set.

Adonis Pouroulis
Chairman

CEO STATEMENT

This is the first CEO Statement I have had the opportunity to write for Rainbow as we mark the end of our first financial year as a public company and I am pleased to be able to report on a transformational 12 months.

Corporate

The most significant event at the corporate level was of course the IPO and Admission of the Company’s shares to trading on the Standard segment of the London Stock Exchange at the end of January 2017. The Company raised gross proceeds of US$8 million by placing new shares with a variety of investors and I have enjoyed getting to know many of our shareholders better over the course of the year and keeping them up to date with the Company’s progress.

Rainbow maintains a small corporate office in the UK, where I am based with Rainbow’s CFO, Jim Wynn, thereby keeping overheads to a minimum, whilst the vast majority of the Company’s administration and operating staff are based in Burundi.

Operations – Mining

During the 2016-17 financial year we were only able to commence work in earnest after completion of the IPO, which provided the funding for the development of the Gakara Project. The Company has selected the Gasagwe area to be its first area of mining operations, which is expected to provide ore from mining activities for at least the first two years of production, with other areas (such as Gashirwe) expected to come online thereafter.

A variety of preparatory tasks were required before mining activities could begin at Gasagwe: these included access road construction, updated environmental studies and approvals, negotiation with land holders and settlement of compensation, recruitment and training of workers, and import of machinery. By the end of June 2017 the mining team at Gasagwe had made excellent progress in stripping waste material in order to expose the rare earth bearing veins which will constitute the run of mine ore.

Just after the financial year end, in July 2017, Rainbow hosted an Inauguration Ceremony at Gasagwe where a formal ribbon cutting was undertaken by the President of the Republic of Burundi, His Excellency Pierre Nkurunziza. The ceremony was well attended and we are delighted with the support we have received to date from the Burundi government and local community.

Operations – Processing

Rainbow’s production plan involves all run of mine ore being processed into rare earth mineral concentrate by its processing plant located in the Kabezi region, some 20km from the mining areas and about 13km south of Burundi’s capital city, Bujumbura. This site is advantageous to Rainbow, being relatively flat because of its location near Lake Tanganyika, and due to its proximity to a main asphalt road, which will provide good transportation links for export of concentrate.

Work has progressed very encouragingly on the Kabezi plant site over the past few months (although not without challenges), with all of the bulk earthworks completed before the end of the financial year followed by civil cement works, and construction of an office block, warehouse, and the processing plant itself all in progress since year end, managed by our EPCM contractors Obsideo from South Africa but utilising local labour at all times. At the time of writing, the completion of construction and commissioning of the plant is expected in the coming weeks, which should allow us to meet our target of shipping first concentrate in Q4 2017.

We have deliberately built in a relatively large amount of volume capacity within the processing plant design, which should enable Rainbow to comfortably increase annual production of concentrate in years to come, should the demand be there, without any significant capital expenditure when new mining areas come on stream.

Corporate Social Responsibility

Rainbow values the strong relationships it has formed in Burundi and we understand that our social licence to operate is only as strong as those relationships. We take great care to include local communities in all our activities, whether it be holding public consultations well in advance of undertaking work on the ground, ensuring that our workforce is sourced locally, or, wherever possible, using Burundian contracting companies for elements of construction and transportation.

In the 2016-17 financial year, Rainbow recruited and trained 108 new employees from the areas around the Gasagwe mine and the Kabezi processing plant with 27 following soon after the year end and also provided work for up to 88 sub-contractor employees at the end of June. Rainbow has also established a catering co-operative alongside its operations which allows local people to prepare food for all of the employees.

Wherever land is appropriated for Rainbow’s activities we are diligent in ensuring that the correct compensation is paid to all families that have an interest in land or crops affected, based on a formula set out in Burundian law.

Rainbow is proud to maintain an objective for a zero-harm operation. For the period to 30 June 2017 the Company did not incur a single Lost Time Injury (‘LTI’), nor indeed any incident requiring medical assistance. Our staff are encouraged to report all incidents and ‘near misses’ in order to improve the safety environment for anyone that may be affected by Rainbow’s operations.

We were delighted to be able to support the 50th anniversary celebrations of the parish church in Mutambu, the town nearest to Gasagwe, in May 2017, and as part of the Inauguration Ceremony in July 2017 Rainbow organised a football tournament between the local districts.

CSR objectives for the coming year include promotion and sponsorship of academic prizes for all schools within the local area and a tree planting campaign.

The Rare Earths market

The world demand for rare earths is growing each year with production currently dominated by China. With a producing mine located outside of China, Rainbow will be important to Western buyers of rare earth materials concerned about security and provenance of supply and seeking a non-Chinese source. During the IPO process, our investors were keen to understand the dynamics of the rare earths market that we felt were crucial and there are two in particular that respectively have an impact on either supply or demand.

Firstly it has become very clear that the Chinese government has made strenuous efforts to clamp down on so called illegal production of rare earths in China, both to enforce environmental standards and to consolidate production within the hands of six state-approved groups. This, combined with falling inventory levels, has contributed to much tighter supply in recent months and consequently increasing prices.

Secondly, virtually every week we now receive news reports concerning the potential rapid increase in production of and demand for electric vehicles, whether mandated by national governments as part of environmental policies or by car manufacturers themselves, with some such as Volvo announcing that all new models after 2019 will be electric or hybrid vehicles. Whilst car manufacture is already a large consumer of rare earth materials, the basic fact is that each electric vehicle will use even more – principally due to the permanent magnets incorporated in the motor. When added to the considerable demand for rare earth magnets also created by the wind turbine industry, it is clear to see that the increasing movement towards green energy will stimulate further demand for rare earth materials.

Rainbow team

We have a small team of truly committed individuals, who have pulled together over the last 12 months to give Rainbow the best possible start to life as a public company. I would like to pay particular thanks to Rainbow’s Executive Committee: Gilbert Midende (General Manager), Braam Jankowitz (Project Manager), Cesare Morelli (Technical Director) and Jim Wynn (Chief Financial Officer) who provide such support and wise counsel to me, however I am grateful to all our employees for the hard work and dedication they show every day and I feel proud to work with you all.

Outlook for 2017-18

The current financial year is likely to be even more momentous for Rainbow than the last and should see the first sales of our rare earth concentrate through thyssenkrupp Raw Materials in Q4 2017, with production and sales then ramping up on a steady basis through 2018. We have seen increases in prices of the various rare earth elements in the oxide and metal forms over the course of 2017, with our ‘basket price’ for Gasagwe concentrate increasing by around 70% in 2017 so far, which bodes very well for the future returns from the Gakara Project as we seek to develop one of the very few non-Chinese sources of rare earths. An exciting year lies ahead.

Martin Eales

Chief Executive Officer

OPERATIONS REVIEW

Preparation work for the IPO

Between July 2016 and January 2017, activity at the Gakara project was restricted to maintaining the Company’s good standing in Burundi and providing information and support for the independent Competent Person’s Report (‘CPR’) which was completed by MSA Group (‘MSA’) in October 2016. This document was first and foremost a requirement of the IPO and listing process, but also provides the Company and its investors with a detailed independent report of the project and its context.

Despite considerable historic mining activities, the Gakara Project was considered by MSA to be an Exploration Target1, as defined in the JORC Code, rather than a Mineral Resource, which was estimated as consisting of between 20,000 and 80,000 tonnes of mineralised material grading 47-67% TREO. MSA also recommended that a period of Trial Mining be conducted at key locations (notably Gasagwe and Gashirwe West) in order to confirm procedures and methodologies to be applied in full-scale commercial mining of a project.

The CPR was published together with the IPO prospectus on 25 January 2017. By February 2017, US$8 million in gross proceeds had been raised, and work began to bring the Gakara Project into production, with a target date of shipping first concentrate in Q4 2017.

Consistent with the recommendations in the CPR, the Directors decided that the amount of additional exploration work required to declare a Mineral Resource or a maiden Ore Reserve would be uneconomic at the stage of the Company’s development.

In addition, the Directors believed that exploration information regarding the deposit at Gakara, together with historic project and production data, underlined the continuity of the mineralisation as well as the appropriateness of the mining and processing techniques, and that the commencement of operations was therefore commercially viable from the outset.

Construction work at Gakara

Following the IPO, work began on the Gakara Project. Operations were divided into two main areas – mining activities, which initially focused at the Gasagwe deposit within the mining permit; and work on the processing plant site at Kabezi.

Gasagwe mine site

In Q2 2017, earth-moving equipment was selected and ordered (consisting of two Tractor Loader Backhoes ‘TLBs’, one tractor and a trailer), while work commenced on site preparation using locally-hired workers and contractors.

Initial activity included basic site preparation, such as obtaining suitable accommodation and facilities, developing access routes, and recruiting a local workforce. In addition, preliminary exposure of the vein at Gasagwe continued using manual techniques, in order to remove overburden and identify the scale of the deposit ahead of full scale waste removal activities.

Mine preparation activities at the site commenced in April 2017, and by the end of June 2017 a total workforce of 114 staff and 2 expatriate managers had been recruited.

Although the TLBs had cleared customs only just prior to the end of the period, considerable progress had been made on site, with some 4,595 tonnes of pre-stripping completed using hand tools and wheelbarrows.

The upper levels of the Gasagwe vein had been exposed, which indicated a strike length of the ‘main vein’ in excess of 80 metres, with a number of smaller side veins adding to the overall size of the deposit.

The fact that the ‘main vein’ appears to be significantly larger than initial estimates has been extremely encouraging, as has the testwork of its composition (which in August 2017 indicated that the upper portions had an average grade of 62% TREO, compared to MSA guidance of between 47-67%). However, progress of operations has been hampered by a number of practical challenges including the availability of fuel, reliability of contractor equipment, delays to importation of equipment, and the slow progress of receiving final formal approval for full scale mining operations.

In spite of this, the stripping of waste material has progressed well. The extraction of ore from this vein commenced in earnest once the ROM stockpile bunkers were completed at the Kabezi plant site in September 2017. This will allow management to meet its target of first production of mineral concentrate in Q4 2017.

Kabezi plant site

After considering various alternatives, a site for the plant location was chosen near Kabezi, approximately 13km south of Bujumbura next to the RN3 road. Although approximately 20km from the mine site areas, given the relatively low volumes of ROM ore to be transported to the plant from the mine (typically a single truck per day), the advantages of good road connectivity, sources of water, and flatter terrain outweighed the extra haul distances.

The site was acquired in April 2017, and clearance of vegetation began in May 2017. Bulk earthworks were undertaken by a local contractor and completed in June, and concrete works were substantially completed in September.

In March 2017, a fixed-price EPCM contract was signed with Obsideo Consulting for the design, procurement, construction and commissioning of its processing plant. Under the terms of the contract, Obsideo would be responsible for delivering and commissioning a plant designed to process the Gakara ROM ore into a mineral concentrate, for a price of approximately US$1.8 million.

At the end of June 2017, work had progressed in line with expectations, with parts having been selected from individual suppliers and shipments due to be transported to the plant site between July and October 2017.

The first containers that arrived encountered minor delays while clearance documentation was finalised, however as more goods have arrived, the process has become smoother.

A local contractor was engaged to perform the civils and concrete works at site, the bulk of which was completed in August and September. Practical challenges faced by the Company included the availability of building materials as well as trained workers, however this work is still expected to be completed in order to meet the target of producing first ore in Q4 2017.

As at 3 October 2017, the majority of civils work has been completed and most of the plant equipment has arrived on site. Construction and commissioning is therefore expected to be completed in time to meet the overall target for exporting the first shipment of mineral concentrate in Q4 2017.

Safety and Health

Since commencement of activities on the ground in Gasagwe and Kabezi, all employees, contractors and sub-contractors have been mandatorily inducted in safety procedures. By the end of June 2017, not only had no LTIs been reported, but no ‘near misses’ or incidents requiring medical treatment have occurred. A total of 74,000 LTI-free man hours had been worked during this period.

 

FINANCIAL REVIEW

Profit and loss

During the year ended 30 June 2017, activity within the Company focused on fundraising and documentation prior to the IPO in January 2017, followed by exploration, mine preparation and construction activity. There were no sales during the year, therefore no revenue has been reported, and expenditure has been split between those costs that have been expensed to the income statement (including corporate and support activities), and those that have been capitalised as part of the construction costs of the Gakara mine.

Administration expenses of US$1.3 million (2016: US$0.6 million) included corporate salaries of US$0.3 million, US$0.2 million relating to IPO costs, US$0.5 million representing the accounting charges for share options issued in the year and US$0.3 million of other administrative and corporate costs. The increase compared to the prior year reflects the increase in activity levels, particularly connected with and subsequent to the IPO.

Exploration support costs, which are not capitalised, totalled US$0.1 million in the year (including travelling and salaries), slightly higher than the previous year.

Finance costs of US$0.2 million relate mainly to the effective interest charges on the Pala Loan which was repaid in the year. Finance income refers to the gain on extinguishment of the Pala Loan of US$0.2 million.

No taxation charges were recognised in either the year ended 30 June 2017 or 2016. The Group generated a loss after tax of US$1.4m, an increase of some 17% compared with the year ending 30 June 2016. This increase reflects the costs expensed associated with IPO and the significant change in support activity levels following the raising of funding in January 2017.

Balance sheet

The Company’s Non-current assets of US$6.0 million relate to the capitalised exploration and mine development costs of the Gakara Project in Burundi. During the year, this increased by approximately US$2.2 million, essentially as a result of capex in the year. The Gakara Project was reclassified from exploration and evaluation assets to mine development costs within property, plant and equipment in the year as the project was considered to have reached commercial and technical feasibility for development.

The Company had total liabilities of US$0.4 million (2016: US$2.4 million), of which US$0.3 million related to amounts owed to staff, shareholders and in respect of payroll taxes due at year end.

During the year, the Company repaid in full the Pala Loan settling the liability in cash for US$1.7 million.

Cashflow

Net cash in the 12 months to 30 June 2017 increased by US$3.0 million.

 

Cash outflows included operating expenses and net movements in receivables and payables (net cashflow from operating activities) totalling US$0.8 million, US$2.1 million on exploration and mining capex, and the repayment of the Pala loan for US$1.7 million.

Cash inflow related to the equity placement which raised US$7.4 million net of costs and a US$0.3 million loan drawn in the period and subsequently settled in equity at IPO.

Financing

The IPO listing resulted in the settlement of the Pala loan, which had been the Company’s principal outstanding loan during the year.

Taxation

The corporation tax rate in Burundi is 30%, however no revenues were earned during the period, and therefore no taxable profits reported.

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