Rainbow Rare Earths Regulatory News (RBW)

FOR IMMEDIATE RELEASE

9 October 2019

Rainbow Rare Earths Ltd ('Rainbow' or 'the Company') (LSE: RBW)

Audited results for the year ended 30 June 2019

Rainbow Rare Earths Ltd, the Rare Earth Element ('REE') mining company, is pleased to announce its audited results for the 12 months ended 30 June 2019.

Chief Executive George Bennett stated: "The results for the 12 months to 30 June 2019 reflected a tough year for Rainbow. However, while production was challenging, it would be more correct to characterise our operating methods in the year as trial mining. We have been able to learn a lot about our project in the year, and are now adapting the way we operate, and while we will continue the trial mining at Gakara, we are moving to a more mechanised, efficient operation. This experience gained in this trial mining phase will enhance our understanding of this orebody whilst we prove that we can develop the project as a low-cost mine, while at the same time focussing our efforts on developing our understanding of the orebody. We have already embarked on a programme of test work and further exploration whose aim is to define a JORC Resource sufficient to support an initial ten-year life of mine, with a first stage target production of 10,000 tonnes of concentrate a year grading at +/- 54-56% TREO."

2018-19 HIGHLIGHTS

·; First full year of production - 850 tonnes of concentrate sold at average grade of 57% Total Rare Earth Oxides ('TREO'), an increase on 475 tonnes in previous year

·; Adjusted EBITDA loss in the period of US$3.4 million (2018: US$2.0 million) with operating problems encountered during rainy season in particular

·; Net loss for the year of US$12.3 million (2018: US$2.6 million) includes:

o Impairment of US$3.9 million in respect of initial pits at Gasagwe and Murambi, and the plant at Kabezi

o Depreciation of US$2.6 million

o US$2.5 million cost of the Lind Convertible which was settled in June and July 2019

·; Production challenges underlined need to undertake additional exploration to define the ore body, and to move to more mechanised mining

·; George Bennett appointed CEO in August 2019 to spearhead this new strategy

The financial information in this release does not constitute the Financial Statements. The Group's Annual Report which includes the audit report and audited Financial Statements for the year ended 30 June 2019, will be available during October on the Company's website at www.rainbowrareearths.com. The auditor's report for the year ended 30 June 2019 was unqualified but included a paragraph highlighting the existence of a material uncertainty over going concern.

**ENDS**

For further information, please contact:

Notes to Editors:

Rainbow's focus is the Gakara Project in Burundi, one of the highest-grade (47%-67% Total Rare Earth Oxide) rare earths projects globally and the only African producer.

The Company began production of rare earth concentrates in Q4 2017 and has a ten-year distribution and offtake agreement with multinational thyssenkrupp Materials Trading secured for the sale of at least 5,000tpa of concentrate produced.

The Gakara basket is weighted heavily towards the magnet rare earths, including neodymium and praseodymium, which are driving demand and account for 70% of annual global REE sales due to their use in vital components in motors, generators, wind turbines, and electric vehicles.

CHAIRMAN'S STATEMENT

The year to 30 June 2019 presented many challenges, particularly at the operating level, but also clearly underlined that Gakara has the potential to be a world-class mine, delivering rare earths into a market that is on the cusp of undergoing potentially explosive growth, driven by green technologies and electric vehicles.

Gakara is a unique asset. Its veins reach grades far in excess of any other rare earth deposits anywhere in the world, and the mineralisation is in the form of seams of almost pure bastnaesite/monazite.

We have discovered these veins outcropping at surface over almost all of the 39km2 mining permit, which tells us that the deposit contains a potentially vast quantity of high-grade ore. But more recent testing suggests that mineralisation exists across the deposit in lower grades too. This presents us with the possibility that we are looking at an even larger deposit than we had originally thought, and one which may be amenable to bulk mining.

The key to unlocking the value of this deposit will be in rolling out a programme of further exploration, with the objective of allowing us to model the resource in more detail. Not only will this show the full extent of the deposit, but it will allow us to develop a mining and processing plan which will allow us to realise the maximum value from it.

We have had some success in extracting targeted high-grade veins at our first two sites; however, we have learnt that we need to choose the right equipment and mining method to operate efficiently and effectively.

Nevertheless, we have successfully demonstrated that not only is there a strong demand for our concentrate, but that we can successfully export our product. We believe we are the only exporter of rare earth concentrate by sea in the world.

In August 2019, Martin Eales stepped down as Chief Executive. Martin's leadership was invaluable as we transformed Rainbow from an early stage exploration project, through its IPO in January 2017, and into its current form. We are grateful for Martin's input and guidance over the Company's formative years.

At the same time, I was pleased to announce the appointment of George Bennett to the Board of Rainbow as Chief Executive Officer. Not only does George share the ambition of myself and my fellow Board members regarding the future of Rainbow, but he brings with him considerable experience in the natural resources sector, and, crucially, a track record of delivering shareholder value.

In the short time since his appointment, he has initiated a number of changes in strategy which we believe will pave the way for the Company to become the second largest rare earth mine outside China. Much work remains to be done, but George's vision, energy, and determination, together with that of the management team and the Board, give me every confidence that we are firmly on the right track.

The rare earth market has received a considerable amount of attention during 2019, with trade tensions between the US and China leading to speculation about the security of supply of REs, many of which are critical not only to vital sectors such as technology, electric vehicles, and turbines, but also are used in military and scientific applications. China accounts for 90% of world production of REs, and such concerns underline the importance of a significant non-Chinese source such as Gakara.

However, we believe the wider fundamentals to be even more important. REs such as Neodymium and Praseodymium are used in high-growth industries, and as a result, demand is expected to increase dramatically in the coming years. Yet at the same time, very few new sources are likely to come online, which will create a supply shortfall which is likely to push prices up significantly from current levels.

Although 2019 was undoubtedly a challenging year for Rainbow and its shareholders, the Company is now embarking on a new, much more ambitious direction under new leadership, and will be perfectly placed to benefit from the increased demand for REs in the coming years.

Finally, I would like to thank the many people who have given their support to Rainbow during the year: my fellow Board members for their advice and counsel; the staff and management of the Company, particularly those in Burundi who have shown determination and resilience in challenging conditions; our wider stakeholders including the communities in which we operate, our suppliers, local officials and members of the Burundian ministries of mines and finance, who have been incredibly supportive.

Adonis Pouroulis

Chairman

CHIEF EXECUTIVE OFFICER'S REVIEW

Before I took on the role as Chief Executive Officer in August 2019, I took the opportunity to visit Burundi to see for myself the Gakara mine. This visit confirmed my initial impressions of the project: that the deposit has the potential to be a genuinely world-class rare earth deposit; but that the mining and processing of the orebody, up until that point, had not employed a conventional approach for a new mining project.

The mining permit extends over 39km2, and to date well over 1,000 rare earth occurrences at surface have been identified, from all over the licence area. There are over 30 RE targets, many of which were mined by the Belgians 40-60 years ago. In mineralogical terms, these occurrences are strikingly homogeneous, which tells us they are part of the same mineralisation. In fact, we now believe that the permit area is not only pervaded with high grade veins of varying thickness, but that mineralisation also exists in between the veins, which suggests that the area contains a very much larger deposit of rare earths that needs to be confirmed by our revised exploration strategy.

Of course, the precise scale and nature of the orebody can only be determined with confidence through exploration work, which is the foundation for any mining project. A modest drilling programme was completed in 2018, which was mainly focussed on the Kiyenzi deposit. Only a relatively small number of drill cores were selected for analysis, and the cores chosen were those showing areas of visible mineralisation. As a first step, we are now sending all drill cores for analysis, which should quickly give us a much better understanding of the deposit at Kiyenzi in particular. The initial two diamond drill cores, fully analysed from Kiyenzi, appear to confirm our belief that mineralisation exists between the high-grade veins.

In addition, we are developing a programme of exploration work designed to confirm, as a first step, a deposit sufficient to support a 10-year mine life, with concentrate production targeted at 10,000 tonnes per annum. These levels are more ambitious than previous targets, but we believe they are achievable as a result of a change in the approach to defining the resource within our mining permit and a change in the mining method.

Until September 2019, mining focused exclusively on high-grade veins, which were extracted by hand, with all other materials considered waste. Once we have defined a larger orebody to JORC standards, we will develop a mine plan that will extract ore in bulk, by mechanical means. This will allow us to extract a far greater quantity of material at a much quicker rate, and will mean a far larger tonnage of RoM material but with a lower overall grade of mineralisation.

The mining of lower grade material will, we believe, be most efficiently handled by introducing a simple pre-concentration step possibly involving a scrubber, DMS and spirals, to be confirmed by the ongoing test work. This is likely to be most economical and practical if undertaken nearer the mechanical mining activity.

I am fully aware that investor confidence in the project can only be won through hard work, and hard evidence. I intend to deliver such information to the market as and when it becomes available to us.

In parallel with this exploration and test work programme, we are investing in new mining fleet, which will deliver significant cost savings compared with the rented fleet currently in use, and which will be far better suited to the terrain (particularly in wet conditions). We will continue to mine at the Murambi pit only, which we believe will provide sufficient ore for at least a year, but in a more efficient way than before - the ore extraction will be mechanised, and we will therefore be able to operate with a reduced workforce, delivering further cost savings, while still maintaining our social licence within Burundi. The objective of operations is to reach breakeven profitability at the mine site level by January 2020, which will allow us to deploy our cash resources to develop the resource into a much larger proven target with the ultimate aim of achieving 10,000 tonnes per annum of concentrate.

A more realistic assessment of production over the coming 12 months, combined with the additional focus on expanded exploration, and a metallurgical and mineralogical test work programme as the first phase in developing a much larger project in terms of production and Life of Mine ('LoM'), will mean that further funding will be required over the next 12 months. However, we are also determined to ensure that additional financing is structured in such a way as to minimise dilution, and phased such that it follows on the back of successful progress we have made towards our objectives, which we believe will underline the huge value in our project and thus improve our valuation.

The Company announced an initial JORC Resource in December 2018, but on a limited scope. We are now testing all the samples collected during the 2018 drilling programme (rather than those that only showed visible mineralisation), and are planning to undertake further drilling in key areas. As a result, I am confident we can deliver a JORC resource in early 2020, supporting our target production levels, and I am equally confident that a bulk mining approach will be far more efficient and scalable than we have seen to date.

But I am also encouraged by the mineralogy of the ore at Gakara. The Kabezi process plant is small in scale and simple in scope - it includes crushing and gravity separation only - and yet the trial mining to date has been able to consistently produce a concentrate of 54-58% TREO, from even lower-grade material we have tested to support my initial impressions of the project. This underlines how simple the mineralogy and metallurgy of the ore is, and is a major differentiating factor compared with other RE projects, many of which include large and complex beneficiation steps and yet still cannot reach concentrate grades close to those of Gakara.

It should also be mentioned that the levels of Uranium and Thorium in the deposit are negligible which demonstrates how benign our ore is and how environmental impact of mining and processing is very low for a RE project, which is hugely advantageous. In most RE deposits around the world Uranium and Thorium are key elements that require extra steps in the process flow sheet for extraction and add huge opex and capex costs to any project. Rainbow has exported concentrate to China, which has very strict limits of radioactivity - imposing limits of less than 0.2µSv/hr (roughly equivalent to background radiation in a granitic area) - without any problems to date.

I mentioned that our target is to define a JORC-compliant Resource sufficient to support the production of 10,000 tonnes of concentrate over a 10-year mine life - which is more than double our previous target. However, this represents just the first stage for the Gakara project and is likely to be based on just one or two individual deposits. Around 30 potential targets have been identified for further exploration many of which were mined by the Belgians, and once we have achieved the first stage, we will undoubtedly continue to drill further areas to grow the project even further. I would point out that over the last 30 years, the vast majority of large-scale modern mines built in Africa, have been developed from the initial colonial mines rediscovered by their respective mining companies.

In the past, we have also mentioned our interest in developing a down-stream separation/beneficiation capability, which would enable us to process our concentrate into a mixed rare earth carbonate or oxide, or possibly down to individual RE oxides. This would allow us to capture significantly more of the value of our concentrate, and remains firmly in our plans. However, the first step is defining a source of feedstock for such a plant - and our plans in this area will emerge once we have a better understanding of the orebody.

A lot of hard work has gone into developing the Gakara project to date. The deposit is truly unique in its scale and nature, and it was perhaps inevitable that some of the early decisions needed to be revisited. It was clear that before any detailed production plan could be formulated, a far better understanding of the ore body was necessary, and that subsequent mining and processing methods were likely to be much more efficient if mechanised and with larger quantities of ore.

That the Gakara deposit had enormous potential was never in doubt. But I would not have taken on the role as Chief Executive, nor would I have invested personally in the project, had I not believed that the Company could be grown significantly in scale, and would thus be transformed into a RE mine that could compete on the world stage, and be hugely profitable in the process.

I look forward to updating you all on our progress in the months to come.

George Bennett

Chief Executive Officer

OPERATIONS REVIEW

Production overview

Notes

1. Gross and net sales prices, TK transport and marketing costs, and Other sales costs are shown per tonne of concentrate sold

2. Production costs are shown per tonne of concentrate exported

3. Revenue reported in the Financial Statements represents the Net sales price of the tonnes sold in the period

Mining operations in the year

Mining operations began well in July-September 2018 as production focused on the Gasagwe pit. In dry conditions, waste stripping made good progress and a number of additional veins were exposed, which more than offset variability in thickness and direction of the main vein.

The advent of the rainy season in October 2018 brought challenges as the fleet of haul trucks, all rented locally, proved unable to operate in wet conditions. As a result, waste removal fell and therefore ore exposure also slowed.

In December, production began in earnest at a second site, Murambi. However, the construction of the haul road to the waste dump was slowed, and most of the waste removed had to be placed as road surfacing, where appropriate, or side cast in order to expose the maximum vein material in the short term.

The lack of ore supply to the plant put pressure on the Company's cash position, and underlined the need to review operating procedures in order to become profitable.

Plant processing

Following the completion of construction at the end of 2017-18, the plant underwent performance tests in August 2018, which were successfully passed. During the year, the plant performed in line with expectations, however production of concentrate was impacted by the shortage of run of mine ore from the pits.

Final concentrate sales in the year amounted to 850 tonnes averaging a grade of 57% TREO, which represented a disappointing total compared with expectations.

Rare earths prices

The price that Rainbow receives for its concentrate is a function of the basket price of the underlying individual rare earth oxides contained in its concentrate, as well as of the overall grade of material sold (expressed as a % of TREO), less a discount to take into account the fact that the concentrate consists of mixed and unseparated oxides.

During the year to 30 June 2019, 850 tonnes of concentrate were sold, at an average grade of 57% TREO. This resulted in a gross average realised sales price of US$1,949 per tonne (net realised sales price US$1,812 per tonne, after accounting for TK deductions for marketing fees of 3.5% and handling costs).

The prime reason for this fall in prices was a drop in underlying rare earth oxide prices, on which Rainbow's final sales price is based. During the 12 months to 30 June 2019, Rainbow's basket price fell from US$12.78/kg to US$11.92/kg, and the average price in the year was US$11.45/kg, 18% lower than the average for the prior year (US$13.93/kg)

Safety and Health

The Company takes its health and safety extremely seriously, and was proud of having achieved a total of over 1.6 million hours without an LTI. Unfortunately, in February 2019, this record was broken when two employees suffered minor injuries following a lightning strike near a rain shelter where mine workers were taking shelter during a storm. The Lost Time Injury Frequency Ratio ('LTIFR') for the year was therefore 0.40 (2018: 0.00).

FINANCIAL REVIEW

Profit and loss

With the construction of the Kabezi plant having been completed in the prior year, exports of concentrate commencing in December 2017 and production subsequently building, the Company determined commercial production to have been reached with effect from 1 July 2018 under its accounting policies. As a result, all revenues and production costs in the year have been recorded through the income statement - whereas in the prior year, production costs relating to the mining, processing, and sales of concentrate were capitalised as mine development costs, net of a US$1.0 million adjustment to eliminate the margin on test revenues from the sale of 475 tonnes of concentrate that represented the contribution to the development costs prior to commencement of commercial levels of production.

Revenues in the period were US$1.5 million, representing 850 tonnes of concentrate exported and sold at an average net realised price of US$1,812 per tonne. In the prior year, 450 tonnes were sold at a net price of US$2,088 per tonne.

Royalty and transport costs of US$0.3 million include the 4% government royalty on exports, as well as the cost of trucking concentrate from the plant to the port of Mombasa for export.

Production costs of US$3.1 million including US$0.6 million of plant costs, US$1.4 million of mining costs, and US$1.1 million of local support costs.

The stockpile movement of US$0.2 million reflects the movement in the value of ore and concentrate stockpiles, which are valued at the lower of cost and net realisable value. The disappointing levels of production in the second half of the year meant that the cost per tonne attributed to this material was higher than its net realisable value, resulting in a write-down of the value of the inventory by US$0.2 million.

Administration expenses of US$1.4 million include corporate and head office costs, and were lower than the prior year figure of US$2.0 million as a result of cost reduction measures as well as the fact that the prior year included a staff bonus of US$0.4 million.

Adjusted EBITDA for the year, reflecting the above items, was a loss of US$3.4 million, an increase compared to the prior year's figure of US$2.0 million.

Share-based payments totalled less than US$0.1 million in the year (2018: US$0.7m), and included a credit of US$0.1 million in respect of share options which lapsed on the basis of non-market performance conditions not having been met. There were no new employee share options awarded in the year.

Depreciation was charged for the first time in the year, as a result of commercial production having been judged to have been reached as at July 2018.

Following a revision to the way in which the Company plans to mine and process material, as explained in the CEO Statement, management reviewed the carrying value of its property, plant and equipment, and concluded that the capitalised costs in respect of the existing plant at Kabezi, and the mine sites of Gasagwe and Murambi should be fully written down, on the basis that the future profitability and cash generation of these activities could not be asserted with confidence. As a result, an impairment of US$3.9 million was reflected in the income statement during the period. The carrying value of the remaining assets (US$6.4 million) relate to the wider project, and include exploration and mine development costs that are expected to support economic value in the future, as the operation is grown into a much larger, bulk-mining operation.

Finance income of US$0.4 million (2018: US$0.3 million) included foreign exchange gains on movements chiefly between the Burundian Franc ('BIF') and US dollars, the reporting currency of the Group.

Finance costs of US$2.6 million (2018: US$0.1 million) included US$2.5 million in respect of a convertible loan note with Lind Partners, granted in January 2019 and converted in June 2019 (see note 6 for further details), and interest on the Company's overdraft in Burundi, as well as bank charges.

Tax charges included withholding tax and corporation tax in Burundi.

Balance sheet

The Company's Non-current assets of US$6.4 million (2018: US$11.2 million) related to the capitalised brownfield exploration and mine development costs of the Gakara Project in Burundi. In addition to the impairment of US$3.9 million referred to earlier, the reduction in value reflected the net impact of capex of US$1.6 million less depreciation of US$2.6 million.

At 30 June 2019, inventory of US$0.1 million (2018:US$0.3 million) largely related to the value of the 51 tonnes of concentrate bagged but not exported at year end.

The Company had borrowings of US$1.6 million (2018: US$0.8 million), largely consisting of a US$0.7 million convertible loan from Pella Ventures Limited, and a US$0.8 million (2018: US$0.8 million) bank overdraft facility with Finbank in Burundi.

Trade and other payables amounted to US$2.1 million (2018: US$1.4 million), with the increase the result of increased operating activities as well as cashflow constraints meaning many supplier balances were stretched over the year end and settled in July and August 2019.

Cashflow

Net cash in the 12 months to 30 June 2019 decreased by US$0.2 million (2018: decrease of US$2.9 million).

Cash outflows included operating expenses and net movements in receivables and payables (net cash used in operating activities) totalling US$2.1 million (2018:US$1.8 million), and US$1.6 million on brownfield exploration and mining capex (2018: US$5.2 million).

Cash inflows of US$3.5 million reflected the Company's financing activities during the year (2018: US$4.2 million), as discussed below.

Financing

In order to fund ongoing working capital and capex requirements, the Company raised a net US$3.5 million in financing during the year, the main elements of which were as follows:

·; US$1.9 million (net of transaction costs) was raised as a result of a placing of approximately 13 million shares at a price of 12 pence per share in August 2018.

·; In January, the Company entered into a financing facility with Lind Partners. This included a convertible loan of US$0.75 million, as well as an equity facility, of which three tranches of US$100k each were drawn during the year. Proceeds from the convertible amounted to US$750k, with gross proceeds from the three equity tranches amounting to US$0.3m, which, after deduction of fees in connection with these transactions, resulted in net cash received of US$0.9 million.

·; In May 2019, the Company entered into a convertible loan with Pella Ventures Ltd, whose beneficiary is A Pouroulis, for US$0.7 million. This amount was intended to provide bridge financing ahead of a larger equity placing which was concluded in July 2019. This amount is included under Proceeds of New Borrowings in the year.

On 2 July 2019, the Company completed an equity placing that raised net proceeds of US$4.2 million with new and existing shareholders. In addition, shares were allotted to satisfy the convertible loan with Lind Partners, which is now fully settled. A total of 163,975,884 shares were allotted in total under this transaction, of which 121,207,778 were for cash, 4,859,603 to settle outstanding remuneration, and 37,908,503 in settlement of the Lind Convertible, the Pella convertible, and other liabilities.

Taxation

The corporation tax rate in Burundi is 30%, however no taxable profits were earned during the period. Nevertheless, the Company paid a total of US$131k in withholding tax, corporation tax (based on a minimum 1.5% of revenue in Burundi), and other taxes, in Burundi.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 June 2019

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2019

These financial statements were approved and authorised for issue by the Board of Directors on 8 October 2019 and signed on its behalf by:

George Bennett

Director

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 30 June 2019

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 30 June 2019

NOTES TO THE FINANCIAL STATEMENTS

1. GENERAL INFORMATION

Reporting entity

Rainbow Rare Earths Limited ('the Company' or 'Rainbow') is a company domiciled in Guernsey and incorporated on 5 August 2011, with company registration number 53831, and is a company limited by shares. The Company's registered office is Trafalgar Court, Admiral Park, St Peter Port, Guernsey. The consolidated financial statements of the Company for the years ended 30 June 2019 and 30 June 2018 comprise the Company and its subsidiaries together referred to as the 'Group'.

2. ACCOUNTING POLICIES

The Financial Statements of the Company and its subsidiaries ('the Group') are prepared in accordance with International Financial Reporting Standards ('IFRS') (IFRS and IFRIC Interpretations) issued by the International Accounting Standards Board ('IASB'), as adopted by the European Union.

Going Concern

As at 7 October 2019, the last practicable date before the publication of these accounts, the Company had total cash of US$0.4 million.

A balance of US$1.4 million in respect of subscriptions receivable from shares allotted in July 2019 remained outstanding, however the Board have a high degree of confidence that these funds will be forthcoming during the month of October.

As part of the review of operations undertaken in August and September 2019, management considered that the mining approach adopted until September 2019 at Gakara could no longer be expected with confidence to become profitable, and that while the deposit had considerable potential, a robust mine plan first required more extensive exploration work, aimed at understanding and defining a large, potentially lower-grade orebody, and test work aimed at determining the optimal processing methodology.

Nevertheless, the Company also considered that by reducing operating costs and driving operating efficiencies, production levels could be expected to reach break-even levels within Burundi by January 2020, thus mitigating future operating losses, while retaining the asset and the permit in good order, and protecting Rainbow's social licence in country.

A revised cashflow forecast was prepared based on this approach, covering the period of at least 12 months from the date of publication of these accounts, which included two elements: operating cashflows from the reduced-scale production at Gakara; and an investment plan including the purchase of new mining equipment as well as an exploration and test work programme.

The operating cashflow forecast assumes mining would continue at the Murambi pit alone, and that the overall cost base would be reduced considerably by cutting the workforce, by replacing expensive rented equipment with purchased vehicles, and by disciplined cost management in all areas. A revised breakeven target of 110 tonnes of concentrate per month versus the previous target of 300 tonnes was considered achievable with this tighter, more efficient operating approach.

In terms of the investment programme, management earmarked US$0.6m for mine fleet purchases, and an estimated total of US$1.0 million on drilling, sampling and metallurgical/mineralogical test work, with the objective of defining a resource and processing methodology capable of sustaining a 10 year life of mine producing 10,000 tonne of concentrate per month.

The cashflows thus described indicated that a funding requirement of approximately US$1.6 million would be required over and above the receipt of US$1.4 million detailed above. Management are confident that this money can be raised from new investors, based on indications of interest from credible potential investors received to date. Management are eager to defer any equity investment until funds would be needed, in order to allow the share price to improve, thus reducing dilution of existing shareholders.

In addition, management are confident that the US$0.8 million overdraft facility with Finbank will remain in place, based on continued discussions with the Finbank management, who are keen to transform the facility into a term loan once a revised production plan has been established, based on the new mining methodology and a robust JORC resource.

Management acknowledge that the cashflow forecast contains several assumptions and uncertainties, and that if worse outcomes were to arise in respect of these assumptions, the funding shortfall might be greater and therefore more expensive, more dilutive, or more difficult to obtain. These include the following:

- Production assumptions reflect management's best estimates, but are not based on JORC-compliant resources or reserves, as a result, actual production may be lower than forecast

- The forecast assumes operating efficiencies as a result of purchasing new mining vehicles (in place of older rented models less suited to the terrain) and through other improvement initiatives. Should these improvements prove less successful, production may not reach forecast levels

- RE prices are assumed to be at levels close to prevailing levels in September 2019 - however a fall in RE prices would result in operating losses which would increase the funding shortfall

If operating cashflows were lower than anticipated, the Company would consider suspending mining operations in order to stem cash outflows, as well as deferring its investment programme.

In considering the appropriateness of the Going Concern basis, management have considered a worst-case scenario to be one that involved the cessation of production activity from January 2020, and a suspension of the investment and exploration programme pending securing of sufficient funds. The funding shortfall in order to continue in operation under such a negative scenario, is estimated to be US$0.8 million.

The Board is confident that this funding would be secured, based on its history of successful fundraising, as well as indications of interest received to date from credible third-party investors. However, it also acknowledges that this funding has not, at the present time, been secured with 100% certainty, which has been a deliberate decision in order to avoid unnecessary dilution at the current share price, which the Board believes will rise in the coming months. Accordingly, the Board accepts that the need for additional funding represents a material uncertainty which casts doubt on the ability of the Company to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business.

The standards which were issued and effective for periods starting on or after 1 July 2018 have been adopted in the year and have not had a material impact to the Group financial statements. The Group has elected not to early adopt the following revised and amended standards.

The Company has reviewed and considered these new standards and interpretations and none of these are expected to have a material effect on the reported results or financial position of the Company except for the following:

IFRS 9 Financial instruments

The complete standard was issued in July 2014 including the requirements previously issued and additional amendments. The new standard replaces IAS 39 and includes a new expected loss impairment model, changes to the classification and measurement requirements of financial assets as well as to hedge accounting. The new standard became effective for financial years beginning on or after 1 January 2018.

The impacts of adopting IFRS 9, applied using the modified retrospective approach, on the Group results have been as follows:

Impairment: The standard introduces an 'expected credit loss' model for the assessment of impairment of financial assets held at amortised cost. The impact of this transition difference is not considered material to the Group following application of the expected credit loss model noting the absence of significant financial assets.

Classification and measurement: The measurement and accounting treatment of the Group's financial assets is materially unchanged on application of the new standard.

IFRS 16 Leases

The future adoption of 'IFRS 16: Leases' from 1 January 2019, provides for a new model of lessee accounting in which all leases, other than short-term and small-ticket-item leases, will be accounted for by the recognition on the balance sheet of a right-to-use asset and an associated lease liability, with the subsequent amortisation of the right-to-use asset over the lease term. However, as the Company currently has no material leases other than short-term, the expected impact of the adoption of IFRS 16 is immaterial.

Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

The consolidated financial statements present the results of the Company and its subsidiaries as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full.

The results of undertakings acquired or disposed of are consolidated from or to the date when control passes to or from the Group. The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Statement of Comprehensive Income from the date that control commences until the date that control ceases.

Where necessary, adjustments are made to the results of subsidiaries to bring the accounting policies they use into line with those used by the Group.

Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity. Non-controlling interests consist of the non-controlling shareholder's share of changes in equity. The non-controlling interests' share of losses, where applicable, are attributed to the non-controlling interests irrespective of whether the non-controlling shareholders have a binding obligation and are able to make an additional investment to cover the losses. On acquisition of a non-controlling interest the relevant non-controlling interest share of equity is extinguished and the difference between the fair value of consideration paid and the relevant carrying value of the non-controlling interest is recorded in retained earnings.

The consolidated financial statements are presented in US dollars, which is also the functional currency of the company and its subsidiaries (with the exception of Rainbow Rare Earths UK Limited, whose functional currency is GBP). The Group's strategy is focused on developing a rare earth project in the Republic of Burundi which will generate revenues in United States Dollars and is funded by shareholder equity and other financial liabilities which are principally denominated in United States Dollars.

Transactions in foreign currencies are translated to the functional currency of the Group entity at the rates of exchange prevailing on the dates of the transactions. At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated to the functional currency at the rates prevailing on the reporting date. Exchange differences on all transactions are recognised in the consolidated statement of comprehensive income in the year in which they arise.

Revenue recognition

IFRS 15 established a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced existing revenue recognition guidance, including IAS 18 Revenue. IFRS 15 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. The Company early adopted the standard in FY 2018.

The Company produces and sells rare earth concentrate from its Gakara project in Burundi. Once concentrate has been produced at the Kabezi plant in Burundi, it is bagged, sampled, and loaded into containers for transportation to a port, normally in East Africa, for shipment.

The Company currently has a 10-year distribution and offtake agreement with its customer, TK, which commenced in January 2018, and under which all production up to 10,000 tonnes per annum will be sold. Under the terms of the contract, the Company's performance obligation is considered to be the delivery of concentrate meeting agreed criteria.

The performance obligation is satisfied and associated revenue from customers is recorded when the title for a shipment is transferred to TK, normally at a port in East Africa. On transfer of title, control is considered to have passed to the customer with the Company having right to payment, but no ongoing physical possession or involvement with the concentrate, legal title and insurance risk having transferred.

The price for each shipment is established in accordance with the terms of the offtake agreement, by reference to the market price and quantities of rare earth oxides in each shipment, and the shipping and fees deducted from net proceeds by TK. The Company is entitled to payment for 90% of the shipment on transfer of title with 10% payable subsequently net of any adjustments to reflect quality testing. The Company recognises 100% of the revenue on transfer of title where it is considered highly probable there will be no reversals, having consideration of the independent quality tests performed prior to shipment.

All exploration and appraisal costs incurred are accumulated in respect of each identifiable project area. Costs which are classified as intangible fixed assets are only carried forward to the extent that they are expected to be recovered through the successful development of the area or where activities in the area have not yet reached a stage which permits reasonable assessment as to whether the deposit is commercially viable and technically feasible for extraction.

Pre-licence/project costs are written off immediately. Other costs are also written off unless the Board has determined that the project is commercially viable and technically feasible for extraction, or the determination process has not been completed. Accumulated cost in relation to an abandoned area are written off in full to the statement of comprehensive income in the year in which the decision to abandon the area is made.

Exploration and evaluation assets associated with an identifiable project area are transferred from intangible fixed assets to tangible fixed assets as 'mine development costs' when the commercial viability and technical feasibility of extracting the deposit has been established. This includes consideration of a variety of factors such as whether the requisite permits have been awarded, whether funding required for development is sufficiently certain of being secured, whether an appropriate mining method and mine development plan is established and the results of exploration data including internal and external assessments.

Property, plant and equipment

Property, plant and equipment consists of mine development costs, brownfield exploration activity within the mining permit area, plant and machinery, motor vehicles, computer equipment, and office furniture and fittings.

Property, plant and equipment is initially recognised at cost and subsequently stated at cost less accumulated depreciation and any impairment. The cost of acquisition is the purchase price and any directly attributable costs of acquisition or construction required to bring the asset to the location and condition necessary for the asset to be capable of operating in the manner intended by management.

The Company assesses the stage of a mine development project to determine when it has reached commercial production, at which point the relevant assets begin to be depreciated. Costs associated with bringing the mine into commercial production, including costs such as mining, processing and selling costs for concentrate produced during this period, are capitalised to mine development costs. An adjustment is recorded to cost of sales to eliminate margin generate on revenue during this period with a corresponding reduction in capitalised mine development costs.

The criteria used to assess the date at which commercial production is achieved, being the point at which the mine is ready for its intended use and operating in the manner intended by management, include: completion of a reasonable period of testing, the ability to sustain commercial levels of production, and engineering sign off on the plant performance.

In the case of new mining sites, commercial production is deemed to have been met when the site has received all necessary permits and approvals (including a certificate of environmental conformity) and is in operation as a mine. Prior to this period, any costs associated with the mine site are capitalised.

Depreciation

Property, plant and equipment is depreciated over the shorter of the estimated useful life of the asset using the straight-line method, or the life of mine using the unit of production method and life of mine tonnes. Residual values and useful lives are reviewed on an annual basis and changes are accounted for over the remaining lives.

The applicable depreciation rates are as follows:

Deferred stripping costs

Stripping costs incurred during the development phase of the mine as part of initial removal of overburden are capitalised as mine development costs within property, plant and equipment and depreciated on a units of production basis.

Stripping costs incurred during the production stage of the mine are included within the cost of inventory produced (ie the ROM stockpile) however may be accounted for as a non-current deferred stripping asset, depending on the expectation of when the benefit of the stripping activity is realised through the processing of ore.

To the extent that the benefit from the stripping activity is realised in the form of inventory produced in the current period, the directly attributable costs of that mining activity is treated as part of the ore stockpile inventory.

To the extent that the benefit from the stripping activity is the improved access to ore that will be mined in future periods and the cost is material, the directly attributable costs are treated as a non-current 'stripping activity asset' and depreciated over the relevant section of the ore body. 

Impairment of exploration and evaluation assets

Exploration and evaluation assets are reviewed regularly for indicators of impairment following the guidance in IFRS 6 'Exploration for and Evaluation of Mineral Resources' and tested for impairment where such indicators exist. In addition, these assets are tested for impairment prior to transfers to mine development costs.

In accordance with IFRS 6 the Group considers the following facts and circumstances in their assessment of whether the Group's exploration and evaluation assets may be impaired:

·; whether the period for which the Group has the right to explore in a specific area has expired during the period or will expire in the near future, and is not expected to be renewed;

·; whether substantive expenditure on further exploration for and evaluation of mineral resources in a specific area is neither budgeted nor planned;

·; whether exploration for and evaluation of reserves in a specific area have not led to the discovery of commercially viable quantities of mineable material and the Group has decided to discontinue such activities in the specific area; and

·; whether sufficient data exists to indicate that although a development in a specific area is likely to proceed, the carrying amount of the exploration and evaluation assets is unlikely to be recovered in full from successful development or by sale.

If any such facts or circumstances are noted, the Group, as a next step, perform an impairment test in accordance with the provisions of IAS 36. In such circumstances the aggregate carrying value of the exploration and evaluation asset is compared against the expected recoverable amount of the cash generating unit. The recoverable amount is the higher of value in use and the fair value less costs to sell.

Any impairment arising is recognised in the income statement for the year.

A review is carried out at each balance sheet date to determine whether there is any indication that tangible fixed assets should be impaired. Assets are assessed for indicators of impairment (and subsequently tested for impairment if an indicator exists) at the level of a Cash Generating Unit ('CGU'). A CGU is the smallest group of assets that generates cash inflows from continuing use. If an indication of impairment exists, the recoverable amount of the asset or CGU is determined. The recoverable amount is the higher of value in use and the fair value less cost to sell. In assessing the value in use the expected future cash flows from the assets are determined based on estimates of the life of mine production plans together with estimates of future rare earth prices, capital expenditure necessary to extract the deposit included in the life of mine plan, cash costs and applying a discount rate to the anticipated risk adjusted future cash flows.

An impairment is recognised immediately as an expense to the extent that the carrying amount exceeds the assets' recoverable amount. Where there is a reversal of the conditions leading to an impairment, the impairment is reversed through the income statement.

Leases

Where assets are financed by leasing agreements that give rights approximating to ownership (finance leases), the assets are treated as if they had been purchased outright. The amount capitalised is the present value of the minimum lease payments payable over the term of the lease. The corresponding leasing commitments are shown as amounts payable to the lessor. Depreciation on the relevant assets is charged to profit or loss over the shorter of estimated useful economic life and the term of the lease.

Lease payments are analysed between capital and interest components so that the interest element of the payment is charged to profit or loss over the term of the lease and is calculated so that it represents a constant proportion of the balance of capital repayments outstanding. The capital part reduces the amounts payable to the lessor.

All other leases are treated as operating leases. Their annual rentals are charged to profit or loss on a straight-line basis over the term of the lease.

Environmental rehabilitation costs

An obligation to incur restoration, rehabilitation and environmental costs arises when environmental disturbance is caused by the development or ongoing production of a mining property. Such costs arising from the decommissioning of plant and other site preparation work, discounted to their net present values, are provided for in full as soon as the obligation to incur such costs arises and can be quantified. On recognition of a full provision, an addition is made to property, plant and equipment of the same amount; this addition is then charged against profits on a unit of production basis over the life of the mine. Closure provisions are updated annually for changes in cost estimates as well as for changes to life of mine, with the resulting adjustments made to both the provision balance and the net book value of the associated non-current asset.

Upon issue of a new convertible loan, where the convertible option involves the receipt of a fixed amount of proceeds for a fixed number of shares to be issued on any conversion, the net proceeds received from the issue of convertible loan notes are split between a liability element and an equity component at the date of issue. The fair value of the liability component is estimated by discounting the contractual future cash flows at the prevailing market interest rate for similar non-convertible debt. The difference between the proceeds of issue of the convertible loan notes and the fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Group, is included in equity and is not re-measured.

Subsequent to the initial recognition the liability component is measured at amortised cost using the effective interest method.

On conversion, the liability is reclassified to equity and no gain or loss is recognised in the profit or loss. The finance costs recognised in respect of the convertible borrowings includes the accretion of the liability.

When the terms of a new convertible loan arrangement are such that the option will not be settled by the Company in exchange for a fixed number of its own equity instruments for a fixed amount of cash, the convertible loan (the host contract) is either accounted for as a hybrid financial instrument and the option to convert is an embedded derivative or the whole instrument is designated at fair value through profit and loss.

Where the instrument is bifurcated, the embedded derivative, where material, is separated from the host contract as its risks and characteristics are not closely related to those of the host contract. At each reporting date, the embedded derivative is measured at fair value with changes in fair value recognised in the income statement as they arise. The host contract carrying value on initial recognition is based on the net proceeds of issuance of the convertible loan reduced by the fair value of the embedded derivative and is subsequently carried at each reporting date at amortised cost. The embedded derivative and host contract are presented under separate headings in the statement of financial position. Where the instrument as a whole is designated at fair value the instrument is measured at fair value subsequent to initial recognition and changes in fair value recorded in finance costs.

Where the Company enters into equity drawdown facilities, whereby funds are drawn down initially and settled in shares at a later date, those shares are recorded initially as issued at fair value based on management's best estimation, with a subsequent revaluation recorded based on the final value of the instrument at the date the shares are issued or allocated. Where the value of the shares is fixed but the amount is determined later, the fair value of the shares to be issued is deemed to be the value of the amount drawn down, less any transaction and listing costs.

Financial assets and financial liabilities are recognised on the statement of financial position when the Group becomes a party to the contractual provisions of the instrument.

- Financial assets

Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with a maturity of three months or less.

Trade and other receivables are measured at initial recognition at fair value and are subsequently measured at amortised cost 

using the effective interest method. A provision is established when there is objective evidence that the Group will not be able 

to collect all amounts due. 

The Group assesses on a forward-looking basis the expected credit losses, defined as the difference between the contractual cash flows and the cash flows that are expected to be received, associated with its assets carried at amortised cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables only, the simplified approach permitted by IFRS 9 is applied, which requires expected lifetime losses to be recognised from initial recognition of the receivables.

Losses are recognised in the income statement. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through the income statement

- Financial liabilities

Loans, borrowings and trade and other payables are initially measured at fair value and are subsequently measured at amortised cost using the effective interest rate method. They are classified as current liabilities unless the company has an unconditional right to defer settlement of the liability for at least 12 months after the statements of financial position date.

Convertible loan notes are recorded in line with the policy above.

Equity instruments issued to a creditor to extinguish all or part of a financial liability are initially recognised at their fair value. If their fair value cannot be determined, the equity instruments are measured to reflect the fair value of the financial liability extinguished. The difference between the carrying amount of the financial liability extinguished and the consideration paid is recognised in profit or loss.

Ordinary shares are classified as equity and are recorded at the proceeds received, net of any direct issue costs.

The nature of the Company's reserves is set out in note 21.

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker has been identified as the Chief Executive Officer. It is considered that there is only one segment of the Group being its rare earths project. All revenues from the project are generated in Burundi and sales are exclusively made to a single customer, thyssenkrupp Materials Trading GmbH, with whom the Company has a 10-year offtake agreement signed in 2014.

Equity-settled share-based payments to employees and Directors are measured at the fair value of the equity instrument. The fair value of the equity-settled transactions with employees and Directors is recognised as an expense over the vesting period. The fair values of the equity instruments are determined at the date of grant, taking into account market based vesting conditions.

The fair values of share options are measured using the Black Scholes model. The expected life used in the models is adjusted, based on management's best estimate of the effects of non-transferability, exercise restrictions and behavioural considerations.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees (or other beneficiaries) become fully entitled to the award ('the vesting date').

The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company's best estimate of the number of equity instruments that will ultimately vest.

The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether the market condition is satisfied, provided that all other performance and/or service conditions are satisfied.

Warrants issued are recognised at fair value at the date of grant. The charge is expensed on a straight-line basis over the vesting period. The fair value is measured using the Black-Scholes model. Where warrants are considered to represent a transaction cost attributable to a debt issue, the fair value is recorded in the warrant reserve and deducted from the debt liability and subsequently amortised through the effective interest rate.

3. ACCOUNTING JUDGMENTS AND ESTIMATIONS

The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects both current and future periods. Key sources of estimation uncertainty and judgment are:

Impairment to the carrying value of plant, property and equipment (note 11)

The Group assessed at 30 June 2019 whether an indication existed that suggests the Company's fixed assets may need to be impaired. In accordance with accounting policies, should such an indication exist, then the Company would estimate the recoverable amount of the asset or, where applicable, the cash generating unit to which it belongs. The recoverable amount is assessed by reference to the higher of 'value in use' (being the net present value of expected future cash flows of the relevant cash generating unit) and 'fair value less cost to sell'. 

At 30 June 2019, the carrying value of the Company's fixed assets in respect of the Gakara project was US$11.2 million.

The review of production strategy after year end indicated that the previous method of focussing on high-grade veins was unlikely to be profitable in the foreseeable future, and that although mining was to continue in the near term, this was primarily to reduce operating losses to a minimal level in order to conserve cash, while the Company proceeded with exploration and other test work in order to define a larger, lower-grade resource and bulk mining operation.

Management thus considered this change in outlook to be an indicator of potential impairment in respect of the carrying values of the processing plant at Kabezi, and the Gasagwe and Murambi pits, whose profitability was predicated on mining and processing high grade ores. As the future profitability of high-grade ore mining and processing could not be determined with reasonable confidence, management judged that the carrying value of these assets should be fully written down, and a charge of US$3.9 million was recorded in the accounts at 30 June 2019.

Management considered whether impairment was required in respect of the remaining assets associated with the Gakara licence, primarily related to equipment and historic costs associated with the exploration of the wider licence area. Shortly after the year end, the Company concluded a placing at a share price of 3 pence per share, at which level the Company had a market capitalisation in excess of US$13 million, and on this basis, together with consideration of the plans for the revised development strategy management concluded that no further impairment of the remaining assets at the Gakara level was required.

Commercial production

During the year, the Board reviewed the operation of the Gakara mine and determined that commercial production had been reached at the project with effect from 1 July 2018.

In reaching this conclusion, management considered factors including the completion of construction and commissioning of the treatment plant (as well as the passing of performance tests in August 2018), the rate of ore extraction from the Gasagwe pit in the month (which was in line with targets at that time), and the fact that a number of export and sales cycles had been successfully completed.

As a result, all production and sales costs with effect from the start of the period were expensed as incurred, and all revenues reported through the income statement in accordance with Group policies.

In addition, in December 2018, the Company received its environmental conformity certificate in respect of the Murambi pit, and ore extraction began from January 2019. Prior to this, work was restricted to site preparation activities such as constructing roads, pre-stripping waste and collecting samples. The costs associated with this work were capitalised prior to January 2019.

Share-based payments (note 20)

Share-based payments relate primarily to share options issued by the Company, in relation to employee share benefit schemes. The fair value of such options is calculated using a Black-Scholes model whose input assumptions are derived from market and other internal estimates. The key estimates include volatility rates and the expected life of the options, together with the likelihood of non-market performance conditions being achieved.

During the year, the Company granted 16,718,987 share options with an exercise price of 5.28 pence to an affiliate of Lind Partners, as part of the Lind Facility financing. The share price at the time of grant was 3.28 pence, and using a Black-Scholes model, these share options were deemed to have a fair value of US$499k - however this amount was included as a cost of the Lind Convertible, and not as a share-based payment.

Decommissioning, site rehabilitation and environmental costs (note 18)

The Group's mining and exploration activities are subject to various laws and regulations governing the protection of the environment. The Group recognises management's best estimate of the rehabilitation costs in the period in which they are incurred. Actual costs incurred in future periods could differ materially from the estimates. Additionally, future changes to environmental laws and regulations, life of mine estimates and discount rates could affect the carrying amount of this provision. The Board assessed the extent of rehabilitation and decommissioning required as at 30 June 2019 and concluded that a provision of US$100k should be recognised in respect of future rehabilitation obligations at the Kabezi plant site, and the Gasagwe and Murambi mining areas.

Royalty receivables

Refer to note 13 for judgments in respect of royalty prepayments.

Lind Facility (note 6)

Refer to note 6 for judgments and estimates in respect of the Lind Facility.

Pella convertible

Refer to note 16 for judgments in respect of the Pella convertible loan.

Going concern (note 2)

Refer to note 2 for judgments in respect of the going concern basis of preparation.

4. LOSS FROM OPERATING ACTIVITIES

Operating loss includes:

The non-audit services provided by the Company's auditors BDO LLP during the year related to a review of the unaudited interim results for the six months to 31 December 2018.

5. FINANCE INCOME AND COSTS

FINANCE INCOME

Foreign exchange gains in the current and prior periods mainly relate to gains on settlement of liabilities in Burundi denominated in Burundian Francs ('BIF').

FINANCE COSTS

The charges associated with the Lind Facility are set out in Note 6 below.

The interest on the Pella Convertible loan is discussed in Note 16.

The interest charge on bank borrowing during the year related primarily to the BIF denominated overdraft with Finbank which carries an interest rate of 14%.

6. LIND FACILITY

The Lind Facility represents a finance arrangement entered into by the Company in January 2019 with The Australian Special Opportunity Fund, LP, an entity managed by The Lind Partners LLC ('Lind').

The facility consisted of three elements: an unsecured convertible security amount of US$750k (the 'Lind Convertible'); a 24-month equity drawdown facility of up to US$7.0 million; and share options.

On signing of the facility, the Company received net proceeds of US$775k - of which US$750k was in respect of the Lind Convertible, US$100k was the first drawdown under the equity drawdown facility, and US$75k was withheld as a commitment fee.

Upon the first advancement of funding, the Company issued 7,500,000 shares as collateral to Lind, to be used at Lind's discretion to satisfy future share allotments.

The Lind Convertible amount of US$750k had a two-year term and carried no coupon. It was convertible into Ordinary Shares of the Company by reference to face value of US$900k after a minimum of four months from the date of the agreement (25 January 2019). The conversion price was determined to be the lower of 5.28p (being 130% of the 20-day VWAP prior to the date of the agreement), or a 10% discount to the average of the five consecutive daily VWAPs chosen by Lind during the 20 trading days prior to conversion. The Lind Convertible was initially recorded at the proceeds received, net of transaction costs, and subsequently designated as a liability at fair value through profit and loss held at fair value until settled in equity or the number of shares to be issued was set as a fixed amount.

Lind exercised their right to convert the Lind Convertible into Ordinary Shares in two tranches on 3 and 4 June 2019. The first (3 June 2019) was for 19,047,619 shares at 7.6 pence, equating to £1,448k (US$1,838k); the second (4 June 2019) was for 14,742,632 shares at 5.75 pence, equating to £858k (US$1,077k). The total value of the convertible was thus US$2,915k, based on the fair value of 33,790,251 shares at the date of conversion.

On 30 June 2019, 8,446,360 Ordinary Shares were issued in satisfaction of this exercise, together with the 7,500,000 shares issued as collateral in January 2019, while 17,843,891 Ordinary Shares were allotted on 22 July 2019 following the publication of a Prospectus and the obtaining of the necessary shareholder and regulatory approvals.

In addition to the Lind Convertible, the agreement with Lind also included a 24-month equity drawdown facility. Under the terms of this agreement, Lind agreed to advance monthly amounts of between US$100k and US$300k in return for the allotment of shares in the Company, whose price was based on 90% of the average of five consecutive daily VWAPs chosen by Lind during the 20 trading days prior to the issue of the shares. On initial recognition, the Company recorded shares to be issued and a receivable at fair value which was subsequently revalued based on the fair value of the instrument until such time as the shares were issued or allocated.

The initial drawdown of US$100k on 28 January 2019 was satisfied by the allotment of 3,425,728, with two further drawdowns of US$100k each in March and May 2019 for 5,132,067 and 3,927,500 shares respectively.

As part of the overall agreement with Lind, the Company also issued 16,718,987 share options at an exercise price of 5.28p, being 130% of the 20-day VWAP prior to date of the agreement. The options, which remain in place at the date of this report, have a term of 48 months. These options were valued using a Black-Scholes model at US$499k and were treated as a transaction cost of the Lind instrument.

The variable number of shares that could be issued under the Lind Convertible was fixed at the date of conversion (in two tranches - 3 June and 4 June 2019). Management concluded that the number of shares that could be issued from the date of the conversion notices was fixed given the terms of the agreement whereby clauses that could give rise to any further variability being non-substantive. Accordingly, the value of the convertible was fixed at that date and the increase in fair value of the instrument compared with the initial proceeds was recorded as a finance cost in the income statement as follows:

1. The fair value movement includes the change in the fair value of the convertible loan notes between initial recognition at the US$750k proceeds received and the fair value of the loan note at the date Lind issued conversion notices and fixed the number of shares to be issued, together with cash based transaction costs expensed. Lind opted to use the 7,500,000 collateral shares in part-settlement of the convertible on 3 June 2019. At the time these shares were allotted to Lind, their value was US$383k (based on a share price of 3.9 pence at 28 January 2019). The value of these shares at the time of their use in part-settlement of the convertible was US$724k (based on a share price of 7.60 pence on 3 June 2019). The increase in value of US$341k effectively represented a credit reducing the overall cost of the convertible which is included in the fair value movement of the loan.

2. Drawdowns under the facility were suspended in March 2019. Under the terms of the agreement, the facility may be cancelled without cost after six drawdowns have been made, or at any time prior to that for a cancellation fee of US$75k. The US$75k fee is the expected cost of the equity draw down facility and is the maximum cost to be incurred with regard to cancellation

3. The Fair Value of share options granted to Lind Partners as part of the facility agreement which were considered to represent a transaction cost of the facility and therefore expensed.

The Lind Convertible was settled as follows:

The balance of US$1,375k was recorded on the Balance Sheet at Shares to be Issued at year end. These shares were allotted on 22 July 2019 following the publication of a Prospectus and the obtaining of the necessary shareholder and regulatory approvals.

7. REMUNERATION OF KEY MANAGEMENT PERSONNEL

Key management personnel are defined as being Executive and Non-executive Directors and Persons Discharging Managerial Responsibility ('PDMRs'), who are in effect the members of the Executive Committee.

Their remuneration for the 12 months ended 30 June 2018 and 30 June 2019 is summarised as follows:

Benefits paid to employees include healthcare and pension contributions.

Share-based payments shown above exclude the credit of US$130k in respect of options lapsed in the year due to non-market performance conditions not having been met.

8. TOTAL EMPLOYEE REMUNERATION (INCLUDING KEY MANAGEMENT PERSONNEL)

Share-based payments shown above exclude the credit of US$130k in respect of options which lapsed in the year due to non-market performance conditions not having been met

The average number of employees during the period were made up as follows

9. INCOME TAX EXPENSE

The cost of withholding tax on inbound goods and services in Burundi was US$58k.

US$23k was the cost of corporation tax charge in Burundi, which for accounting periods where no tax profits are reported (such as in the year to 30 June 2019), is based on 1.5% of revenues.

Land tax of US$20k (taxe superficiaire) relates to the tax payable on the holding of the mining permit. US$30k community payments relate to the Company's obligations under its mining convention to pay US$15k per annum to each of the communities in which it operates, Kabezi and Mutambu.

The difference between the total tax expense shown above and the amount calculated by applying the standard rate of corporation tax to the loss before tax is as follows:

Rainbow Rare Earths Limited and Rainbow International Resources Limited are subject to 0% income tax in Guernsey and the British Virgin Islands respectively. Rainbow Rare Earths UK Limited, which was established on 1 April 2017, is subject to an income tax rate in United Kingdom of 19%. In Burundi, Rainbow Burundi SPRL and Rainbow Mining Burundi SM are subject to corporation tax at 30%.

No deferred tax asset has been recognised in respect of the tax losses carried forward as the recoverability of this benefit is dependent on the future profitability of the individual entities within the Group, the timing of which is considered insufficiently certain. The total unrecognised potential deferred tax assets in respect of losses carried forward in Rainbow Rare Earths UK Limited are US$12k (30 June 2018: US$2k), Rainbow Burundi SPRL US$104k (30 June 2018: US$104k), and in respect of Rainbow Mining Burundi SM they are US$1,348k (30 June 2018: US$186k).

10. LOSS PER SHARE

The earnings per share calculations for 30 June 2019 reflect the changes to the number of ordinary shares during the period.

At the start of the year, 174,760,472 shares were in issue. During the year, a total of 41,578,528 new shares were allotted (see note 19 Share Capital) and on 30 June 2019, 216,339,000 shares were in issue. In addition, a further 17,843,891 shares were to be issued at year end, in relation to the Lind Convertible (see note 6). The weighted average of shares in issue in the year was 193,843,716.

Earnings per share have been calculated using the weighted average of ordinary shares. The Company was loss making for all periods presented, therefore the dilutive effect of share options has not been taken account of in the calculation of diluted earnings per share, since this would decrease the loss per share for each of the period reported.

11. PROPERTY, PLANT AND EQUIPMENT

The majority of the construction work at Kabezi and Mutambu was completed in the prior year, and therefore additions to fixed assets were lower in 2019. Included in the US$1.6 million of additions are US$0.5 million in respect of pre-stripping and site preparation work at the Murambi pit, which came into production at the end of December 2018.

Commercial production at the Gakara project was deemed to have been reached on 1 July 2018 (see note 3 Accounting Judgements and Estimates). Accordingly, eligible production costs prior to this were capitalised, and net revenues treated as a deduction to property, plant and equipment. The net impact of these in the prior year was an addition of US$279k to mine development costs.

At 30 June 2019, impairments totalling US$3.9 million were taken against the plant at Kabezi, and against the Murambi and Gasagwe mine sites (see Note 3 for details).

From July 2018, production costs and revenues have been recorded through the income statement, and depreciation has been charged in accordance with the Company's accounting policies. For the same reasons, no depreciation charge was applied during the prior year.

12. INVENTORY

WIP (Work in Progress) represents 51 tonnes of ore undergoing treatment at the Kabezi processing plant, valued at net realisable value which was the lower than the cost of production. The decrease in value of Finished Goods and WIP of US$153k is shown in the income statement as an operating expense under Stockpile Movement.

Consumables mainly relates to fuel stocks at 30 June 2019.

13. PREPAYMENTS

Current prepayments relate to prepaid operating expenses and include US$265k in respect of government royalty payments of 4% which have been paid based on the total basket price of exports, rather than on the discounted price received from the Company's customer TK. These amounts have been recorded as prepayments on the basis that Rainbow believes that they will be offset against future royalty payments, in particular in view of the recommendations of a report published in July 2019 by SRK, commissioned by the World Bank at the request of Rainbow and the government, into the reasonableness of the discount received by Rainbow.

Prepayments also include US$63k in respect of costs in relation to the equity placing which took place in July 2019, after the year end.

14. TRADE AND OTHER RECEIVABLES

VAT recoverable relates to the input VAT recoverable in Burundi, since the VAT registration of the Group's Burundian subsidiary in the previous year.

Sales proceeds receivable represent the cash due from the sale of concentrate which took place prior to 30 June 2019, but for which cash was not received until after year end.

15. CASH AND CASH EQUIVALENTS

No cash amounts were restricted at 30 June 2019 (30 June 2018: nil).

16. BORROWINGS

All borrowings are deemed to be current.

The following table analyses the movement in borrowings during the year:

In addition to the movements above, interest of US$139k in respect of the Finbank overdraft was settled in cash in the year.

Finbank Overdraft

The Bank borrowings relate to an overdraft facility with Finbank in Burundi. It is expressed in BIF and carries an interest rate of 14%. As the facility was initially agreed in October 2017, on a six-month term rolling thereafter, it has been classified as a short-term liability. The balance at 30 June 2019 was 1.9 billion BIF (US$0.8 million).

The overdraft facility was originally agreed as a short-term source of working capital, however has remained in place for longer than originally intended. This arrangement has been through a series of extensions agreed with Finbank. In August 2019, the facility term was reduced to 1.5 billion BIF (US$0.6 million) - a reduction settled in cash. Discussions are ongoing with Finbank with regard to the further reduction of the facility by transforming a portion of the balance (expected to be 1.0 billion BIF, or US$0.4 million) into a term loan repayable over 2-3 years, while the balance of 0.5 billion BIF (US$0.2 million) remains as an overdraft.

Under the terms of this facility, Finbank has security over the fixed and floating assets of Rainbow Mining Burundi SA ('RMB', the local operating company in Burundi which owns the Gakara project and mining permit), the shares of RMB, and the cash held in RMB's Finbank bank accounts. Interest on this account amounted to US$139k during 2019, which was settled in cash.

Pella Convertible

The Pella Convertible loan represented an unsecured bridge funding facility of US$0.7 million announced in May 2019, between the Company and Pella Ventures Limited (an entity in which Adonis Pouroulis, Rainbow's chairman and largest shareholder, has a beneficial interest).

Pella Ventures Limited advanced US$0.7 million to the Company in June for a period of up to 12 months at an interest rate of 15% per annum from drawdown. The terms of the loan agreement dated 7 May 2019 provided that the principal amount of US$700k and the outstanding interest (US$4k) would convert into new Ordinary Shares on the same terms as apply to the next equity fundraising undertaken by the Company. The loan was initially recorded at the proceeds received, net of costs. Subsequently, the host liability has been recorded at amortised cost with the derivative associated with the variable number of shares that would be issued on conversion as a derivative. However, the fair value of the derivative was insignificant at 30 June 2019 given the terms of the instrument and proximity to year end.

Following the completion of that placing in July 2019, the Pella Ventures Convertible converted into 18,636,040 new Ordinary Shares.

17. TRADE AND OTHER PAYABLES

Trade payables and accrued expenses relate to the ongoing operating costs of the mine. These included US$0.4 million in respect of the rental of mining equipment, US$0.4 million for technical and professional mining consulting, and US$0.3 million consumables, equipment, and other running costs.

Amounts due to staff and management include a group bonus accrual of US$0.4 million in addition to deferred director's fees and senior management salaries, which was settled after the year end.

The average terms for trade and other payables are 30 days.

The Directors consider that the carrying value of trade and other payables approximate to their fair value.

18. PROVISIONS

Rehabilitation provisions relate to the anticipated cost of restoring the operating sites at Kabezi, Gasagwe and Murambi.

19. SHARE CAPITAL

The table below shows a reconciliation of share capital movement in the year:

The share placing in August 2018 and the three Lind drawdowns together represent net cash proceeds of shares issued in the period of US$2.1 million (US$2.35 million gross less transaction costs of US$0.21 million).

On 8 August 2018, the Company allotted 13.1 million new ordinary shares at a price of 12 pence per share, raising gross proceeds of approximately US$2.0 million (before costs of US$0.2 million). These allotments included the following related parties:

The table below shows a reconciliation of share capital movement for the year ended 30 June 2018:

On 19 December 2017, the Company issued 20,000,000 ordinary shares as part of an equity placing, to new and existing shareholders (but no management or related parties). Net proceeds for this equity raise amounted to US$3.5 million, after accounting for US$0.2 million of transaction costs.

On 16 April 2018, 134,000 shares were allotted to satisfy the exercise of employee share options.

20. SHARE OPTIONS AND WARRANTS

The total share-based payment charge for the year was US$62k, representing the net of US$192k in respect of the fair value charge for share options in issue, reduced by a credit of US$130k arising on lapsed share options as a result of non-market performance conditions not having been met.

Employee share options

A total of 12,058,400 employee share options had been issued at 30 June 2018.

No new employee share options were granted during the period, however 1,083,334 share options lapsed in the year. The table below shows the movement on share options held by PDMRs in the year:

On 17 September 2018, a total of 1,083,334 share options held by senior managers lapsed as a result of non-market performance targets not having been met for the year ended 30 June 2018. This resulted in a reversal of previously recognised fair value charges of US$130k, which credited against share-based payment charges in the income statement in the year.

All awards vest and are exercisable in three equal tranches: the first on the date of award, and the second and third 12 and 24 months later respectively.

At 30 June 2019, the following employee share options were exercisable and outstanding:

Lind Share Options

In January 2019, 16,718,987 share options were issued to Lind Partners (see note 6) with an exercise price of 5.28 pence. These were exercisable immediately from the date of award for a period of 48 months. The Fair Value of these share options has been estimated using a Black Scholes model to be US$0.5 million. This cost was included under Finance Costs as part of the cost of the Lind Facility.

Warrants

On 9 November 2015 Rainbow Rare Earths issued 6,293 warrants for services with an exercise price of US$14.30 per warrant and a contractual life of 5 years. The separable warrants were issued as consideration for arranging a funding transaction for the Company. Following the share sub-division, the total warrants and exercise price have been adjusted on a pro rata basis in accordance with the existing agreement.

At 30 June 2019, the following share warrants were outstanding:

The Fair Value of share options and warrants awarded in the current and prior year was estimated using a Black-Scholes model. The inputs into the Black‑Scholes were:

Expected volatility was determined by the volatility of a basket of similar listed companies. The expected life used in the model has been on management's best estimate for the effects of exercise restrictions and behaviour.

21. RESERVES

Details in the movements of these reserves are set out in the Statement of Changes in Equity.

22. NON-CONTROLLING INTEREST

The non-controlling interests of the Group's partners in its operations are presented in the table below: