Shares in Rainbow Rare Earths are on the move and, unlike most companies in the mining sector right now, the general trajectory is up.
Three key factors are underpinning this outperformance: a high quality project, high quality management and high quality backers and partners.
The project is Phalaborwa, a rare earths opportunity in South Africa.
The management have come from one of the mining industry’s leading engineering and mine-building companies.
And the backers and partners include the US government.
![An image of a mine in Phalaborwa, South Africa](https://i.dailymail.co.uk/1s/2023/11/13/15/77743475-12743811-image-a-10_1699891115358.jpg)
An image of a mine in Phalaborwa, South Africa
So far, so good.
So what’s the backstory?
“We’ve done four fundraisings for Rainbow Rare Earths since I joined,” says Rainbow chief executive George Bennett. “Three were at a premium, and the fourth was done at the 15p bid price.”
Bennett was founder of MDM Engineering, and as such was responsible for design and construction of scores of mining projects and feasibility studies in Africa and around the world.
And, at just one-twelfth the size of the biggest tailings plant built by MDM, Phalaborwa ought not to be too much of a stretch.
The key thing about Phalaborwa is that it isn’t a new mine, it’s an old gypsum residue stack, created by 60 years of phosphoric acid production.
That might not rock anyone’s world as far as glitz and glamour are concerned, but what we are talking about here is economics, not fashion.
The grade of total rare earths oxide in the stacks is, at 0,44%, by order of magnitude six-to-ten times higher than the grade in the ionic clay rare earths deposits that get mined in Myanmar and China, and which are the source of most of the world’s production.
That means Phalaborwa can make money in a rare earths pricing environment in which few other development projects can.
And if rare earths prices go high, as well they might in a world increasingly polarising into trade blocs, the margins on offer will be almost unbeatable.
Why? – because a great deal of the work required to make a saleable product has already been done, during the gypsum manufacturing process.
The stacks at Phalaborwa are, in a sense, waste. But looked at another way, they are mineralised material that’s already been processed to a significant degree.
“Two thirds of the flowsheet has already taken place,” is how Bennett puts it. “And at zero cost to us.”
Early estimates set annual underlying profits [EBITDA] from Phalaborwa at between US$80mln and US$90mln, even at the current low rare earths prices of around US$70,000 per tonne of NdPr (neodymium and praseodymium).
Put another way, Phalaborwa looks set to deliver a 75% EBITDA margin. And by some forecasts, EBITDA could increase to as much as US$190mln per annum.
But it’s not just about profit. It’s also about location.
This rare earths project is a long way from China. And that’s where the Americans come in.
The latest deal Bennett’s struck brings US Government-backed Techmet in for a US$50mln direct stake in Phalaborwa.
Quite how much of Phalaborwa Techmet will get for its money remains subject to the results of ongoing economic and feasibility studies, but official range has been set at between 15% and 33%.
The point is that a significant portion of the equity component of the capital cost is now in place, and once again Bennet avoids diluting shareholders. This in turn can create something of a virtuous circle on the market. Unsurprisingly, on news of the Techmet deal, Rainbow’s shares rose by nearly 14%, to 15.9p. That’s not quite at the level of the 12-month high hit in September, but it’s pretty close.
So, onwards and upwards from here.
The plan is to start construction at Phalaborwa in 2025 and to be in production by 2026.
A pilot plant is just now getting up and running in Florida and should shortly be able to provide hard and fast proof that the process works at scale.
When the full-blown project gets built, it will be significantly bigger than the pilot plant, says Bennett, but not to the extent that meaningful conclusions can’t be drawn now.
Some projects work off pilot plants that are one hundredth or one-five hundredth of the size of the eventual operation.
Not this one.
End users and financiers will get about as good a look and feel as it’s possible to get from an upcoming project, and it shouldn’t be surprising to anyone if the company’s targeted final investment decision date, of the third quarter of next year, seems to come round pretty quick.
In the meantime, there’s a new project in Brazil to keep the newsflow ticking over.
Here, the opportunity is similar, though further down the line, and a major partner in the shape of Mosaic is already in place. It’s bigger too, but with Phalaborwa well on the way toward production and cash generation that ought not to be an issue.
So will any hypothetical subsequent fundraisings be at a premium or a discount?
“At Phalaborwa, we’ll be the lowest cost producer in the west,” says Bennett.
If that’s not a selling point, nothing is.
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