(Alliance News) - Rainbow Rare Earths Ltd on Wednesday said it signed a deal with Bosveld Phosphates Ltd permitting the 100% ownership of the Phalaborwa project in South Africa.
Berenberg analyst Richard Hatch said this was an "incredibly value-accretive transaction" and also pointed to other near-term catalysts offering "meaningful share price upside" for the firm.
Rainbow Rare Earths is a South Africa and east Africa-focused rare earth oxide producer. Its shares were up 3.4% at 8.79 pence each on Wednesday afternoon in London.
Under the terms of the agreement announced on Wednesday, Rainbow will receive an immediate 85% interest in the unincorporated joint venture that holds the rights to Phalaborwa, with Bosveld holding the remaining 15%, for USD5 million in cash.
This follows on from the original project co-development agreement, which envisioned Rainbow earning a 70% interest in Phalaborwa, further to the completion of a pre-feasibility study on the project.
Rainbow is also being granted a call option to acquire the remaining 15% stake owned by Bosveld in return for USD7 million of equity at any time from October 31, 2023 to December 31, 2025.
Berenberg valued Bosveld's 30% stake, on a risked basis, at USD143 million, adding that this represents "an incredibly value-accretive transaction."
"We assume that, given expected positive near-term newflows (eg pilot plant operation and the production of saleable, mixed rare earth sulphate and subsequent production of separated rare earth oxides to name at least two), the equity is converted at GBP15 per share," Berenberg's Hatch commented.
On completion of a definitive feasibility study, Rainbow said the unincorporated joint venture will be transferred into an incorporated joint venture company and, at Rainbow's election, Bosveld will transfer all assets required for the project into that company.
Chief Executive George Bennett said: "We have always wanted to consolidate our interest in the Phalaborwa project, given the exceptional economics highlighted by our preliminary economic assessment that confirmed a [net present value]10 of USD627 million based on spot rare earth prices at the time of publication. We are therefore delighted to reach this agreement with Bosveld which offers a clear path to Rainbow owning 100% of the project."
"This is an exciting time for Rainbow and Phalaborwa, with the front end of the pilot plant operational in South Africa and the back end being constructed in US. I look forward to announcing the results from the front end pilot testing, confirming we are able to extract the rare earths and produce a saleable mixed rare earth sulphate. The fact that we will have achieved this within three years of signing the initial Phalaborwa earn-in agreement is testament to the combined strength, delivery capabilities and rare earth experience of our technical team," the CEO continued.
Berenberg noted Rainbow's announcement that it remains on track to produce a saleable, mixed rare earth sulphate product in the third quarter of 2023 with positivity, saying it thinks this will be viewed as a "major positive" by the market.
"Furthermore," Berenberg added, "this sulphate will then be shipped to the US for processing through the back end of the pilot plant to produce separated rare earth oxides - this will act as another positive catalyst, in our view."
Berenberg said it expects the firm's additional strategic efforts, as it looks to grow its footprint in the processing of gypsum stacks to recover rare earths, as well as updates on potential strategic partners or offtakers for the Phalaborwa project, to offer additional upside.
"In our view, these are clear, demonstrable, near-term catalysts that offer meaningful share price upside," the bank said.
"We update our model to reflect the revised ownership structure, which is materially [net present value] accretive. Despite the assumption of additional shares issued, our NPV increases materially and our price target increases to 43 pence per share, implying that the stock is trading a 0.20 times [net asset value]. This is a clear positive announcement."
Berenberg rates Rainbow at 'buy' with a price target of 43 pence, raised from 33p previously.
By Heather Rydings, Alliance News senior economics reporter
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Rainbow Rare Earths (RBW)