Rainbow Rare Earths (LON: RBW) shares are up 12% today. The trigger for the rise in RBW shares is the granting of an option to TechMet. This is indeed a good and useful little deal. But the thing to note is that it’s an option. This does not guarantee anything at all. All it means is that at the next stage - project financing - then TechMet is pencilled in, at TechMet’s option, on the term sheet for a significant part of the capital necessary. As with all grants of options that “pencilled” in is important - nothing has been signed in ink as yet.
We’re very interested in Rainbow Rare Earths: “Rainbow Rare Earths (LON: RBW) is a slight oddity in mining stocks. For it's not actually trying to go mining for anything at all. Instead, the aim is to process a waste pile from previous activity and thereby be able to produce rare earths. That imposes a certain limit on how large Rainbow can get - the size of that old waste pile. On the other hand there are many waste piles around of the same material so it might be possible to extend operations over time.
“The really basic thing to understand here about Rainbow is that it's doing something sensible. Note that “sensible” and “definitely makes a profit” are not the same thing, although the first is often a good guide to the second. But the logic of what they're trying to do works. Old fertiliser mining leads to vast piles of phosphogypsum lying around the countryside. This is known to contain rare earths. So, given that the material is already above ground, already ground into fine pieces, it is possible to extract those rare earths. Simple, right?”
The logic of what they’re doing works. Whether it will work financially is another matter but getting that logic right first helps.
Rainbow Rare Earths share price from Google Finance
We’ve also noted that if it works here then it can work elsewhere for RBW shares: “The point is that if this - note “if” - process works on one pile of fertiliser derived phosphogypsum then it will work on others. Which is exactly what has just been announced by Rainbow: “Rainbow Rare Earths is pleased to announce that it has entered into a memorandum of understanding ("MOU") with The Mosaic Company ("Mosaic"), the world's leading integrated producer of concentrated phosphate and potash, to jointly develop a process flowsheet and conduct a preliminary economic assessment related to the extraction of rare earth elements from Mosaic's phosphogypsum stack in the Uberaba area of Minas Gerais in Brazil.”
“Now, from our point of view the really big win would be to be able to get access to the Florida Phosphogypsum stacks. RBW is already working with an FL based firm but we do think that being able to apply the process - assuming it works, of course - to those vast mountains of the stuff they've got there would be truly transformative.”
The specific announcement today is more particular: “TechMet has been granted an option to invest US$50 million as part of the equity funding component for the Phalaborwa capital cost, which will see TechMet take a direct ownership stake at project level. The TechMet stake will be dependent on the net present value set out in the definitive feasibility study for the project. Based on the agreed formula, the equity stake will be within a range of 15-33%.
The TechMet Option is executable for three months following receipt of a credit approved term sheet for construction debt, which will define the total equity requirement for the project development.”
This stage of project financing is a bit Dr. Seuss, if we had some ham we could have ham and eggs for breakfast if we had some eggs. The banks want to see capital committed before they’ll agree to lend, the capital investors want to see banks lined up before they’ll commit. So, everything is on an “if” basis. Which is exactly what this option agreement is. It bolsters Rainbow when talking to banks about debt financing. Which is good, but it’s not actual cash as yet.
