Rainbow Rare Earths Regulatory News (RBW)

28 October 2020

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

Preliminary Announcement of results for the year ended 30 June 2020

Rainbow Rare Earths Ltd, the Rare Earth Element ('REE') mining company, is pleased to announce its preliminary results for the year ended 30 June 2020.

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 2020, will be available on the Company's website at www.rainbowrareearths.com. The auditor's report for the year ended 30 June 2020 was unqualified but included a paragraph highlighting the existence of a material uncertainty over going concern.

Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 until the release of this announcement.

For further information, please contact

CHAIRMAN'S STATEMENT

Over many years in the natural resources sector I have learned that each mining project is unique and the road to success is rarely straight forward. Key to investing is to understand the elements required for success and ensure these are present. Despite the challenges, I remain convinced that not only are Rare Earths an exciting market due for substantial demand growth, but that Rainbow's Gakara Project can be an important and low-cost source of supply for this growing market.

I believe that the elements required to develop the Gakara project into a large-scale commercial success are focused on people, resources and the market. Our vision of becoming a sustainable player in the rare earth world remains in place.

The management transition in August 2019, with the appointment of George Bennett as CEO, has delivered a new focus and drive to the business. The Board and management initiated a strategic review which resulted in a change of direction for the Company. There was a recognition that a greater understanding of both the geology and the mining methodology was required before commercial scale operations could be developed. Accordingly, the project took a necessary step back to the exploration phase to allow this understanding to be developed.

In addition to George's appointment, a number of changes in the senior team during the year have strengthened the company. As I look at the senior management and operational team in place today, I see a clear vision of how to develop a commercial mining project at Gakara, and the skills and experience necessary to deliver that vision.

Since first securing the licence in 2011 I have always believed in the inherent value of the Gakara project, which has many advantages compared to other global rare earth sources.

The grades seen in the stockwork veins are far in excess of any other rare earth deposits anywhere in the world, with the mineralisation present 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.

The mining activities undertaken prior to the strategic review and the subsequent trial mining and processing completed to date has demonstrated that the mineralisation can be upgraded to an extremely high export grade concentrate through simple gravity separation. This concentrate has naturally low levels of radioactivity, making the export for onward processing straight forward and removing the need for a complex processing flow sheet with associated high levels of capital and operating costs.

The project also contains many lower grade breccia hosted resource areas which can be developed in parallel. Every area of the licence tested to date has shown the same amenity for simple gravity processing, with low levels of radioactivity present in the resulting concentrate.

With the correct exploration and mining techniques Rainbow will not only be able to define a large-scale resource, but mine this with minimal dilution and ore loss for a low-cost operation. The simple processing allied to the high in-situ resource grade will allow the project to be developed in a low capital-intensive way, with the large-scale complex processing facilities required for many rare earth projects not needed. The high grade of our exported concentrate also minimises the infrastructure costs associated with exporting our concentrate and ensures that our export costs remain a small portion of the overall project cost base.

Once a project of commercial scale is established, developing further downstream processing to upgrade the concentrate to a higher value product will allow Rainbow's shareholders to realise the true value of the project and their investment.

My belief in rare earth markets as an area of substantial growth driven by green technologies remains undimmed. Prices have been low during the current financial year but have picked up strongly since 30 June 2020. The fundamentals for the growth of both electric vehicles and green energy generation, footprinted in ever tightening global emissions regulations, underpin the future demand growth for rare earth permanent magnets. Significant new sources of supply are unlikely to come online at current rare earth prices, with many projects having the twin challenges of low grades and complex processing requirements. This is likely to create a supply deficit, driving up underlying prices.

Ongoing trade tensions between the US and China have fuelled speculation about the security of supply of rare earths. In addition to electric vehicles and turbines, rare earths are used in specialist military and scientific applications. With China accounting for ~90% of current worldwide production of rare earths, such concerns underline the importance of a significant non-Chinese source such as Gakara.

The expected growth in demand for rare earth metals also lead Rainbow to successfully apply for a number of exploration licences in Zimbabwe during the year, expanding the Company's exploration portfolio beyond the Gakara licence. Detailed exploration at these properties has not yet commenced, with the Covid-19 pandemic making international travel more complex. However, as an entrepreneur, I see many opportunities for additional rare earth projects and will ensure that the best are made available to the Rainbow shareholders.

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

I first invested in Rainbow at IPO as I believed then, as now, that the global rare earth market was poised for a period of significant growth. With ever tightening emissions regulations the growth in electric vehicles and green energy generation, with the associated demand for rare earth magnets, is clear.

Having invested significantly in the July 2019 placing undertaken by the company I was intrigued when invited to visit the Gakara project, and immediately saw not only the long term value opportunity, but previous decisions that needed rectifying in order to allow the project to develop into a true commercial venture. Prior to my formal appointment as CEO I initiated a strategic review, the results of which acknowledged that a lot more work was required before a commercial mine could be developed at Gakara: in order to move forward, we would first need to take a step back to an exploration focus.

On my appointment as CEO in August 2019 no time was wasted in making some initial changes as a result of the strategic review. I strengthened the local team to improve the technical knowledge base, specifically in respect of mining. With extremely high-grade veins in an irregular stock-work system it was clear that the ability to understand the geology and mine it effectively was core to the projects future.

Significant amounts of exploration work had been carried out across the project area since inception, but the huge amount of data generated needed to be organised in a systematic exploration database by CSA Global which has taken time to complete. The impact of the Covid-19 pandemic slowed down our work, delaying the receipt of important assays, but I am pleased with the understanding that has emerged from the recently announced JORC Exploration Target report.

Our JORC Exploration Target has demonstrated that the resource potential in the high-grade stockwork vein system is significant and supports my initial view and statement that the Gakara deposit is part of a very large rare earth mineralised system, capable of supporting commercial production at an initial 5,000 tonnes per annum of concentrate using a new, larger processing facility for an initial 10 year mine life in the nine target areas reviewed to date. The challenge with any stockwork vein system is defining the resource with sufficient confidence to invest given the inherent erratic nature of the veins. The recent JORC Exploration Target report has set out a clear vision of how to deliver that confidence with a low-cost exploration program, expected to take approximately 15 months to execute. I look forward to delivering a more formal JORC compliant resource and thereafter an associated technical feasibility study for this next phase of growth.

These targets represent only a small portion of the known mineralisation across the licence area, with a further seven areas historically mined prior to the Company's ownership that have not yet been explored and a significant number of additional targets identified by the recent TECT structural interpretation and surface exploration. The licence area contains a number of lower grade breccia hosted areas of mineralisation in addition to the high-grade stockwork style vein systems, which could be developed in parallel. For this reason, I intend to pursue a modular approach to growth and believe that the Gakara project will eventually be able to sustain between 10,000 - 20,000 tonnes per annum of rare earth concentrate production.

In respect of our trial mining and processing operations, significant changes have been delivered by our new Project and Mine Manager, Chris Attwood, appointed in September 2019. As a mining engineer, Chris has brought the skills and experience we needed to improve efficiency, driving strengthening production from our pilot plant through the year and, most importantly, creating a blueprint for the mining methodology which will eventually support commercial scale production. Prior to his appointment vein mining was undertaken manually and waste removal was not efficiently managed through the wet season, restricting new sources of ore. Selective mechanical mining of ore now delivers a grade of ~10% rare earth oxides, amongst the highest rare earth run of mine grades in the world, suitable for upgrade in our pilot processing plant. A greater emphasis on waste removal through shortened haul roads suitable for year-round use through both wet and dry seasons and replacing expensive rented mining equipment with an owner managed fleet has delivered us a more efficient overall trial mining operation.

We have been fortunate that the Covid-19 pandemic has not significantly impacted our trial mining and processing operations at site. International travel has become more difficult, such that my management team and I have not been able to travel to site as regularly as usual, and our expatriate staff rosters have become extended. However, there has been no local occurrences and operations at site have been largely unaffected.

As we begin the new financial year, we are investing in increased capacity for our mining fleet to better utilise the capacity of our pilot processing plant, targeting pilot production of 100 tonnes of concentrate per month. Our expanded fleet will also allow our trial mining to expand to new areas, delivering bulk samples and a strong understanding of the mineralised vein intensity across new deposits as part of our exploration program.

Our pilot processing plant continues to operate well, demonstrating that ore sourced from different deposits across the licence area is amenable to simple gravity processing to deliver a high-grade concentrate with low levels of radioactivity suitable for export. This means that we are producing the 'Greenest' rare earth concentrate in the world, using no reagents in our processing circuit to deliver one of the highest grades of rare earth concentrate in the world. As we increase our formal trial mining we will continue to source ore via our exploration teams from across the licence area and batch process this through our pilot plant to ensure that we understand any local variations in the minerology.

Once the commercial scale operation is developed, we aim to capitalise on the enormous value opportunity from further downstream processing. Processing our concentrate to a mixed rare earth carbonate or oxide will enable significantly more of the ultimate project value to be realised for shareholders. To ensure any decisions taken now are consistent with that long-term value creation we are currently in the process of updating the initial beneficiation scoping study performed by SGS in 2015.

As we develop the business, further funding will be required over the next 12 months for our ongoing exploration program and to complete a feasibility study for moving to commercial production. Our recently announced JORC Exploration Target report set out a clear US$3.2 million programme of drilling and other test work to upgrade the confidence in the Gakara mineralisation and allow a JORC compliant resource to be defined. We remain focused on ensuring 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 significant value inherent in the Gakara project.

Our belief that the Gakara deposit has enormous potential has never been in doubt. A lot of hard work has been undertaken this year to deliver a platform for growth. I strongly believe that Gakara can be transformed into a profitable rare earth mine ready to compete on the world stage. I remain fully aware that investor confidence in the project can only be won through hard work, and hard evidence. I look forward to updating you all on our progress in the months to come.

George Bennett

Chief Executive Officer

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 June 2020

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2020

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 30 June 2020

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 30 June 2020

Notes:

1. Basis of Preparation

The financial information set out herein does not constitute the Group's statutory financial statements for the year ended 30 June 2020, but is derived from the Group's audited financial statements. The auditors have reported on the 2020 financial statements and their reports were unqualified but did contain a material uncertainty in relation to going concern. The financial information in this statement is audited but does not have the status of statutory accounts.

The financial statements and the information contained in this announcement have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU), including International Accounting Standards and Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC). This is consistent with the accounting policies in the 30 June 2020 financial statements except for the adoption of IFRS16, leases.

2. Going Concern

As at 27 October 2020, the last practicable date before the publication of these accounts, the Company had total cash of US$0.2 million excluding US$275k from a recent bridge finance facility as set out in note 8.

The Board have reviewed the Group's cash flow forecasts for the period to 31 December 2021. This forecast assumes a continuation of current trial mining activities alongside limited works focused on surface assessment of targets defined from the recently announced geophysical survey and other previously defined exploration targets across the licence area. Any new exploration programmes arising from the recently announced JORC resource statement will require additional funding, although such programmes are currently uncommitted. 

At 30 June 2020 the Group has US$1.7 million of undiscounted financing liabilities including:

· US$0.9 million in an unsecured loan from Pipestone Capital, a Company associated with George Bennett, CEO, which will need to be repaid at the time of the next significant fundraising or 31 December 2021, whichever is earlier. Repayment of this amount in cash is not included in the Group's cash flow forecasts as it is anticipated to be settled as part of the next significant fundraising prior to 31 December 2021.

· US$0.8 million in a term loan from FinBank in Burundi. Repayment of this loan is ongoing at a rate of US$21k per month (including interest), which is included in the Group's cash flow forecasts.

The Board have reviewed forecasts covering a period to 31 December 2021. Based on the Group's cash flow forecasts the Board estimates a total funding requirement of at least US$2.8 million for the period ending 31 December 2021, with funding required from December 2020 onwards.

The Company is currently in the process of investing in additional capital equipment to enhance the scale of the current trial mining as part of its exploration activities, including an additional excavator and ancillary mining and processing equipment. An additional excavator has already been purchased and is currently being shipped to Burundi. The Board has earmarked a further budget of US$250k, which is expected to be financed from the receipt of historically overpaid royalties (US$306k recoverable at 30 June 2020) and the sale of some surplus equipment. This additional equipment is expected to significantly increase the trial mining capacity for the Group's operations at Gakara as part of the exploration programme, allowing 100t of rare earth concentrate to be produced per month as a by-product of the exploration program. At current rare earth prices that additional production could reduce the total funding requirement of at least US$2.8 million for the period ending 31 December 2021 although a funding requirement would remain.

The Board is confident that this funding would be secured, based on its history of successful fundraising. However, it also acknowledges that this funding is not, at the present time, in place, 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 may cast significant 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.

3. Loss per share

The earnings per share calculations for 30 June 2020 reflect the changes to the number of ordinary shares during the period.

At the start of the year, 216,339,000 shares were in issue. During the year, a total of 205,642,551 new shares were allotted and on 30 June 2020, 421,981,551 shares were in issue. The weighted average of shares in issue in the year was 373,141,644.

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 reporting period.

4. Exploration and Evaluation Assets

The unaudited interim accounts for the period ended 31 December 2019 indicated that US$6.2 million was transferred from property, plant and equipment to exploration and evaluation asset on 1 July 2019 with no depreciation recognised prior to transfer. The unaudited income statement included all costs and revenues relating to the trial mining and processing activities, resulting in a reported loss before tax of US$1.8 million. In preparing the financial statements for the year-end 30 June 2020 the assumptions inherent in the unaudited interim accounts relating to the date of transfer and the nature of the ongoing trial mining and processing activities, and the relevant accounting treatment thereof, were refuted and reassessed as disclosed in note 3. As a result, the transfer from property, plant and equipment to exploration and evaluation costs was reduced by US$0.8 million to US$5.4 million and US$0.7 million of costs and revenues relating to trial mining and processing in October to December 2019 have been capitalised rather than being recognised in the income statement.

Included within additions is US$422k (2019: Nil) related to gross revenues earned during the exploration phase which represent a contribution towards exploration costs incurred.

FinBank SA hold security over the fixed and floating assets of Rainbow Mining Burundi SA which include US$6.6 million of exploration and evaluation assets associated with the Gakara mining permit in Burundi.

5. Property, Plant & Equipment

Depreciation of US$157k relating to mining vehicles and site infrastructure was capitalised in the year as part of Exploration and Evaluation costs.

FinBank SA hold security over the fixed and floating assets of Rainbow Mining Burundi SA which include US$941k of tangible fixed assets in Burundi.

6. Borrowings

The following table analyses the movement in borrowings:

In addition, details of the Lind Facility relating to the year ended 30 June 2019 are set out in note 31.

Finbank Loan

The Bank borrowings relate to a loan facility with Finbank in Burundi that was converted from an overdraft facility in December 2019 for a total of 1.5 billion BIF (US$799k). It is expressed in BIF and carries an interest rate of 15%. Prior to the conversion the total amount owing on the original overdraft was reduced and no overdraft remains at 30 June 2020.

Under the terms of this loan, 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 the loan and overdraft account amounted to US$118k (2019: US$139k), which was settled in cash.

Pella Bridge Loan

The Pella bridge loan was 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). The full amount was drawn in June 2019 at an interest rate of 15% per annum. The loan was settled via the issue of 18,636,040 new Ordinary Shares at the same terms as issued to other investors in the placing completed in July 2019 as set out in note 19.

Pipestone Bridge Loan

On 21st February 2020 Pipestone Capital Inc, in which George Bennett, the Company's CEO, has a beneficial interest, provided a US$1 million unsecured bridging loan to the Company. The loan was advanced to provide short term capital to the Company to safeguard Pipestone's position as a significant shareholder ahead of what was expected to be a positive resource update followed by a larger capital raise to secure the long term funding for the Company's investment strategy.

The loan did not bear interest, with the finance cost provided by the issue of 2 million warrants with a 4 year life over the Company's shares at a strike price of 4.55p/share (a 30% premium to the 20 day VWAP and a 1.25p premium to the 3.3p/share closing mid-market price on the date of the loan). The warrants have been valued at US$50k which equates to an interest rate of 15.0% over the expected life of the loan and has been recognised as interest in the year. The warrants are recognised as a separate liability with a maturity in 2-5 years.

In June 2020 the original Pipestone loan was re-financed, with US$75k repaid via the issue of 1,993,779 shares as part of the equity placing announced on 22nd June 2020 at a price of £0.03 per share. The remaining US$925k was extinguished and replaced with a new, interest free, unsecured bridging loan of US$925k pending a larger capital raise expected following the announcement of the Company's updated resource statement. No further warrants were issued. The loan is repayable on the earlier of 31st December 2021 or the date of a fundraising by the Company to raise a minimum of US$3 million in new equity. At the election of Pipestone Capital Inc all or part of the loan balance may be used to subscribe for shares as part of an equity fundraising triggering repayment on the same terms and conditions applicable for all investors at the time of that fundraising.

As the loan was provided by an entity connected with a director of the Company on preferential terms it has been discounted at an effective interest rate of 15% for an estimated 6 month term representing an arms-length short term loan and the discount recognised in an equity reserve to be recognised as interest payable in the 2020-2021 financial year.

 7. Share Capital

The table below shows a reconciliation of share capital movements:

On 3 July 2019 the Company issued 121.2 million new ordinary shares at a price of 3 pence per share, raising gross cash proceeds of approximately US$4.6 million (before costs of US$0.3 million). At the same time the Company issued:

· 4.9 million new ordinary shares at a price of 3 pence per share as settlement of employee bonuses and non-executive director fees

· 18.6 million new ordinary shares at a price of 3 pence per share representing the settlement of the Pella loan.

· 19.3 million new ordinary shares representing the conversion of the Lind facility announced on 10th June at a conversion price of 2.69 pence per share.

On 22 June 2020 the Company issued 37.1 million new ordinary shares at a price of 3 pence per share, raising gross cash proceeds of approximately US$1.4 million (before costs of US$38k). At the same time the Company issued:

· 2.5 million new ordinary shares at a price of 3 pence per share as settlement of non-executive director fees

· 2.0 million new ordinary shares at a price of 3 pence per share representing the partial settlement of the Pipestone loan.

These allotments included the following related parties:

The share placing in August 2018 and the three Lind drawdowns in 2019 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:

8. Post Balance Sheet Events

On 27 October 2020 the Group perceived a bridge loan totalling US$275,000 from related parties as set out below:

Name US$'000

George Bennett (via Pipestone Capital Inc) 150

Alex Lowrie 25

Atul Bali 25

Robert Sinclair 25

Shawn McCormick 25

Pete Gardner (via MPD Consulting Limited) 25

TOTAL 275

The loans are repayable on the earlier of the Company raising US$1.0 million in equity or 31 December 2021.

**ENDS**

Notes to Editors:

Rainbow's focus is the Gakara Project in Burundi, which produces one of the highest-grade concentrates in the world (typically 54% Total Rare Earth Oxide) and is the only African producer of rare earths through the ongoing trial mining operations. The Gakara basket is weighted heavily towards neodymium (Nd) and praseodymium (Pr), which account for over 80% of the value of the Gakara concentrate.

Nd and Pr are vital components of the strongest permanent magnets used for the motors and turbines driving the green technology evolution. Analysts are predicting demand for magnet rare earth oxides will grow substantially over the coming years, driven by increasing adoption of green technology, pushing the overall market for Nd and Pr into deficit.