“We’ve built a mine,” says Martin Eales of Rainbow Rare Earths Ltd (LON:RBW).
That much is certainly true, and by the look of the grades coming out of the Gakara rare-earths project in Burundi, a good one too. As far as can be ascertained, Gakara is the highest grade rare-earths project anywhere in the world.
That being said, Rainbow’s financial results haven’t quite caught up to this attractive reality.
“The numbers are not reflective of where we expect to be in the coming year,” says Eales.
The reason the company posted a pre-tax loss of around US$2.6m in the year to June 2018 is straightforward enough: production is still ramping up and there was a US$700,000 non-cash accounting charge for share options].
At the beginning of the period, production was zero and had only really begun to gather pace towards the summer, building up from when the first tonnes of concentrate was produced in December 2017, halfway through the financial year.
Even now, the final stages of the ramp up are ongoing.
That meant the company was only able to book revenues of US$1mln, and as far as the company’s auditors were concerned at least, that didn’t actually amount to “commercial” production, so revenue and production costs were booked to the balance sheet rather than the income statement.
But in the coming year, it will be very different.
Many of the costs associated with the mining operation at Gakara are fixed, not least the sunk costs, so with every incremental increase in production, margins are likely to rise exponentially.
Accordingly, as the ramp-up continues, Eales expects Rainbow Rare Earths to reach breakeven point at the end of this year, and to turn profitable early next year.
“We should make healthy profits in the first half of the next calendar year,” he says.
And there’s more. As part of the ramp-up at Gakara Eales expects Rainbow to be opening up further new mining areas.
The first new area, at Murambi, is likely to come on stream by the end of the fourth quarter, and more will follow.
“Murambi had a lead time of six-to-nine months,” says Eales. “And our processing plant has the capacity to take more ore.”
Accordingly Rainbow is also looking at progressing development at Kiyenzi too, an area which is geologically different to the narrow, high-grade veins that have so far been the focus of Rainbow’s efforts.
“Kiyenzi is a breccia, or a dispersed vein, covering a much larger area, so there’s lots more mineralised ore than the veins we currently mine and this may be more amenable to mechanised mining,” says Eales.
With all that in mind, Rainbow’s medium-term production targets of 5,000 tonnes by the end of this year, and 6,000 tonnes in the following years looks eminently achievable. The company’s contracted customer, ThyssenKrupp, has rights to buy all output up to the 10,000 tonnes mark, so there’s optimism all around.
And the rare-earths price continues to strengthen too, despite the uncertainties around President Trump’s trade policies. Eales isn’t concerned about tariff wars, though. He prefers to focus on the fundamentals of the global economy which look set to create increased demand for rare-earths over a considerable period of time, particularly as production rates for electric vehicles rise.
How then can Rainbow Rare Earths capitalise further on this opportunity?
After all, at the moment it’s still a relatively small operation, albeit that with the exception of Lynas’s plant in Malaysia, which is potentially facing a review, it’s the only listed rare-earths production project outside of China.
The first answer to that question is that a new JORC resource is due shortly. That will put a floor on the company’s resource base and give it a solid foundation for growth. Exploration work will continue, the aim of which is to uncover near-term production tonnes and to add to the JORC resource figure.
But separately, Rainbow Rare Earths is also planning to become more involved in processing its own product, and thereby capturing more of the value.
At the moment concentrate is shipped out to customers, with very little processing. This is because it is high grade. But if in the future Rainbow Rare Earths can undertake for itself some of the processing that customers undertake, then the premiums will be all the greater.
Rainbow announced in August that it had formed a partnership with TechMet Limited, a technology metals investment company, whereby it would be carried on a full definitive feasibility study for a downstream processing solution, although it might be a while before we see the results.
In the meantime, the cash will keep coming in, margins will keep growing, and Rainbow Rare Earths will continue to produce and sell some of the key elements required by the 21st Century’s technical revolution.