24 October 2022

Rainbow Rare Earths Limited

("Rainbow" or "the Company")

LSE: RBW

Preliminary results for the year ended 30 June 2022

Rainbow Rare Earths is pleased to announce its preliminary results for the year ended 30 June 2022 ("FY 2022").

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 2022, will be available on the Company's website at www.rainbowrareearths.com.

Highlights

·    Increasing demand for magnet rare earths underpinned by rising electric vehicle sales forecasts and mounting capacity acceleration in the offshore wind market.

·    A major shortage of neodymium and praseodymium is predicted by 2035[1] due to a lack of rare earths sources and the inability of existing producers to increase their output.

·    Rare earth prices rose substantially in FY 2022, with Phalaborwa's basket price up 82%, and long-term supply demand fundamentals support significant increases towards the second half of this decade.

·    Progress made at Phalaborwa during FY 2022, culminating in the recent publication of Phalaborwa's PEA highlighting its robust economics and the significant opportunity provided by this project to provide near-term production of rare earth oxides:

o  Base case scenario establishes an NPV₁₀ of US$627 million, an IRR of 40%, an average operating margin of 75% and a two-year payback period.

o  Using 2022 year to date average rare earth prices or long term forecast rare earth prices, the PEA delivers an NPV₁₀ of c. US$1 billion, an average operating margin over 80%, an IRR of 51% and a payback of 1.7 years.

·    By collaborating with third parties, Rainbow is working to harness value from rare earths contained within other secondary phosphogypsum sources.

·    Rainbow became a member of the European Raw Material Alliance ("ERMA") in FY 2022 - an essential alliance working to accelerate the green and digital transition through securing and reinforcing rare earths supply chains.

·    Continued constructive engagement with all stakeholders at Gakara in Burundi, with confidence in the Company's ability to find a resolution to allow operations to recommence.

Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Market Abuse Regulation (EU) No 596/2014 ("MAR") which has been incorporated into UK law by the European Union (Withdrawal) Act 2018 until the release of this announcement.

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Notes to Editors:

Rainbow's strategy is to identify near-term, secondary rare earths production opportunities. Meeting escalating demand for critical minerals needed for global decarbonisation, we are focused on producing the magnet rare earth metals neodymium and praseodymium ("NdPr"), dysprosium and terbium. With our strong operating experience, proven project development experience, unique intellectual property and diversified portfolio, Rainbow will develop a responsible rare earths supply chain to drive the green energy transition.

The Phalaborwa Rare Earths Project, located in South Africa, comprises an Inferred Mineral Resource Estimate of 30.7Mt at 0.43% TREO contained within unconsolidated gypsum stacks derived from historic phosphate hard rock mining. High value NdPr oxide represents 29.1% of the total contained rare earth oxides, with economic Dysprosium and Terbium oxide credits enhancing the overall value of the rare earth basket in the stacks. The rare earths are contained in chemical form in the gypsum stacks, which allows high value separated rare earth oxides to be produced in a single processing plant at site with lower operating costs than a typical rare earth mineral project.

Chairman's statement

From wind turbines to EVs, clean energy is dependent on unlocking increased supplies of critical minerals, including rare earths such as neodymium, praseodymium, dysprosium and terbium which are fundamental components in permanent magnets.

Current geopolitical tensions and energy security risks serve to further highlight the urgency of the clean energy transition, which will not be possible without a reliable supply of minerals. According to the IEA, demand for rare earth elements by 2040 may rise between three and seven times from today's levels.

China currently dominates the global production of rare earth magnets; however, many major governments have now implemented critical and strategic materials policies, with a focus on creating independent rare earth supply.

Rainbow has recently become a member of the European Raw Material Alliance ("ERMA") - an essential alliance which is working to accelerate the green and digital transition through securing and reinforcing rare earths supply chains. Aiming to make Europe economically more resilient, ERMA's goal is to diversify supply chains, promote innovation, create jobs, and attract investment.

With our near-term development opportunity at Phalaborwa, alongside our unique and innovative technologies and processes, we believe Rainbow is well positioned to contribute to a responsible, independent supply chain, unlocking sources of critical permanent magnet rare earths which are required to drive global decarbonisation.

According to Adamus Intelligence, a major shortage of NdPr is predicted by 2035 due to a lack of rare earths sources in the market and the inability of existing producers to increase their output. This underscores the compelling opportunity presented to Rainbow, both at Phalaborwa and from the wider application of our proprietary technology, to achieve near-term, responsible and efficient rare earths production from secondary sources.

Rare earth prices rose substantially in FY 2022, with Phalaborwa's basket price up 82% to US$173.91 per kg of magnet rare earth oxides. Whilst prices fell back after the end of the financial year, they have since moved upwards again and the long-term supply demand fundamentals support significant increases towards the second half of this decade.

We have made significant strides forward in 2022 with a number of interesting collaborations and opportunities which we believe will be central to harnessing value from rare earths contained within secondary sources. Rainbow continues to work closely with K-Technologies Inc. ("K-Tech") and is planning on jointly patenting the rare earths extraction technology we have together developed. We are also collaborating with OCP S.A. ("OCP"), the Moroccan world leading producer of phosphate products, and Mohammed VI Polytechnic University ("UM6P"), a Moroccan university, by signing a Master Agreement in August 2022 on rare earths extraction from phosphogypsum. In addition to this, we signed a Memorandum of Understanding with a major chemicals company in South Africa in June, as part of which we are investigating the opportunity to extract rare earth elements from a nitro phosphate process stream and identifying further global opportunities for our unique rare earth extraction technology.

At our Gakara project in Burundi, which has been on care and maintenance since June 2021, we continue to engage constructively with all stakeholders and remain confident in our ability to resolve the issue and allow operations to recommence.

On behalf of the Board of Directors, I would like to extend our gratitude to our shareholders for their steadfast support, and to Rainbow's management team, employees and contractors for their unwavering commitment to the business' success. We also thank our host governments for their continued productive engagement. Having contributed a considerable amount of value to the Board since we founded the Company in 2011, Robert Sinclair resigned as a Non-Executive Director due to health reasons in January 2022. The Board joins me in thanking Robert for the considerable contribution he has made to Rainbow.

Our purpose is to produce the critical rare earth products required to progress the global green technology revolution in an efficient and responsible manner and thanks to the good progress at Phalaborwa, I believe we are working well towards achieving this goal.

I am encouraged by additional opportunities to leverage our intellectual property and technology to extract rare earths from phosphogypsum. Through our processing projects, which have fundamentally different risk profiles to traditional rare earth mining projects, we see enormous potential to facilitate near-term access to sources of critical permanent magnet rare earths, which are required to decarbonise energy systems in an environmentally responsible way.

CEO's statement

This has been a year of notable progress for Rainbow, enabling us to unlock a valuable, near-term source of the rare earth permanent magnet metals required so urgently to drive the global green energy revolution. This has involved carrying out a programme of detailed test work at Phalaborwa to better understand the exciting opportunity presented by this asset, leading to the development of an economic flowsheet and the recent publication of the preliminary economic assessment ("PEA").

By concentrating on phosphogypsum opportunities, the usual, extensive resource definition period is removed, significantly reducing the long lead time and risks associated with bringing a traditional mine into production. In addition, we benefit from considerable reductions in capital ("capex") and operating costs ("opex") compared to a traditional mine, due to the absence of hard rock mining, mine waste disposal, ore crushing and milling within the overall project cost base. Because the rare earth elements are present in a 'cracked' chemical form in the phosphogypsum, Rainbow's process will deliver separated rare earth oxides in a single process flowsheet at site. This replaces the multiple stages of reagent intensive processing usually required to crack a rare earth mineral concentrate and separate out the rare earth oxides from a mixed rare earth carbonate. Rainbow's process is also expected to have a number of environmental benefits.

Phalaborwa's PEA, which establishes an NPV₁₀[2] of US$627 million, an IRR[3] of 40%, an average operating margin of 75% and a payback period of only 2 years, corroborates our long-held view of the operation's enormous potential as a low capital intensity, high margin, near-term rare earths development project. The base case financial model presented, using near-term rare earth price forecasts well below 2022 averages, demonstrates a robust project with low sensitivity to changes in both rare earth prices and costs.

The work carried out to date at this asset demonstrates Rainbow's ability to overcome the historical technical, environmental, and economic challenges related to extracting rare earths from phosphogypsum. Importantly, whilst the configuration of the process flowsheet is innovative, each individual stage is well tested on a commercial basis, with the required equipment and reagents being readily available.

The successful completion of this PEA represents not only a breakthrough step in the development of Phalaborwa, demonstrating the viability of this opportunity, but also underscores the broader potential to use our unique IP and technology to extract rare earths from other phosphogypsum sources on a global scale. We now intend to advance to feasibility study, identify all permits required for Phalaborwa's development, engage with the relevant authorities to expedite permitting and undertake further process optimisation tests culminating in an extensive process pilot plant operation.

We are committed to responsible business practices from an environmental, social and governance perspective. As a brownfield site, the development of Phalaborwa provides us with a significant opportunity to make positive environmental, social and economic impacts. Effective stakeholder engagement will be a fundamental part of project development, concentrating on understanding key risks and integrating stakeholder considerations into project development decisions to create long-term value.

I believe Phalaborwa's PEA accurately reflects the rigour and expertise we apply to project assessment. As a team, we have led numerous projects through development and have significant experience throughout the asset lifecycle from optimisation and feasibility to plant construction and commissioning. I am exceptionally proud of the progress we have made over the past few years and am confident that we have the right people in place to take Phalaborwa's development forward. With our proven operating experience, unique phosphogypsum processing intellectual property and portfolio of opportunities, I believe that Rainbow is well positioned to develop a responsible rare earths supply chain to drive the green energy transition.

Operational review

Phalaborwa

Rainbow's Phalaborwa rare earths project in South Africa presents the Company with an exciting near-term opportunity to extract rare earths from a secondary source. Contained in phosphogypsum in two unconsolidated stacks derived from historic phosphate hard rock mining, the rare earths are in a 'cracked' chemical form allowing separated rare earth oxides to be produced at site. With no significant costs associated with mining, crushing and grinding ore, or with chemical cracking of the underlying rare earth minerals, the project economics are exceptionally strong.

Phalaborwa has an inferred mineral resource estimate of 30.7Mt at 0.43% TREO, with a rare earth basket that is weighted towards high value NdPr oxide, a critical building block for the global energy transition, which represents 29.1% of the total contained rare earth oxides. Economic Dysprosium (Dy) and Terbium (Tb) oxide credits further enhance its overall value. Phalaborwa's NdPr grade is substantially higher than a typical low-cost ionic clay rare earth project, much closer to traditional hard rock style deposits.

Fundamental to unlocking the rare earths contained within the phosphogypsum at Phalaborwa (and more widely) is the innovative processing flowsheet developed by Rainbow in parallel with K-Tech. It represents a breakthrough in allowing for the economic extraction of rare earth elements from phosphogypsum, which has historically proven to be challenging. The flowsheet will comprise the following steps:

·    Phosphogypsum will be reclaimed hydraulically from the existing stacks and pumped to the processing facility removing soluble impurities prior to the leach process.

·    A pre-leach regime will be employed to remove fluoride from the gypsum stream, allowing rare earth grades in the pregnant leach solution to be maximised. The extracted fluoride will produce reagents for use elsewhere in the processing circuit, reducing operating costs.

·    The fluoride leached phosphogypsum progresses to a rare earth counter current sulphuric acid leach system for the extraction of the target rare earth elements. This allows for successful recycling of the various acid streams to optimise the overall processing costs.

·    A rapid consolidation process for the rare earths in the pregnant leach solution allows the rare earths to be concentrated with primary impurity rejection. This process replaces the originally anticipated nano filtration system, which significantly improves the overall acid recycling, thereby reducing operating costs.

·    The rapid consolidation process feeds the downstream continuous ion exchange and continuous ion chromatography processes to deliver separated rare earth oxides. The flow rates to these processes are considerably lower than originally anticipated using nano filtration techniques resulting in significant capital and operating cost savings.

Phalaborwa PEA

Rainbow is earning a 70% interest in the Phalaborwa project by delivering a pre-feasibility study, which is now in planning having published the strong economic outcome from the PEA.

Robust base case economics

The PEA was based on processing 2.2 million tonnes per annum of phosphogypsum over a 15-year project life to deliver 26,208 tonnes of separated rare earth magnet oxides at an average cost of US$33.86/kg. This delivers an exceptional 75% operating margin at the base case basket price of US$137.92 per kg for the rare earth oxides, based on near term forecasts well below both 2022 year to date average prices and long-term market forecasts.

The base case financial model set out in the PEA delivered exceptionally robust economic returns including:

·    Post-tax NPV₁₀ of US$627.4 million, representing 212% of the US$295.5 million total capital cost1;

·    Post-tax IRR of 40%; and

·    Post-tax payback of upfront capital costs after 2.0 years of operations.

NPV upside using year-to-date prices

Using 2022 year to date average rare earth prices or long term forecast rare earth prices the PEA delivers an EBITDA operating margin over 80%, with an NPV₁₀ of c. US$1 billion and a payback of 1.7 years.

Minimal sensitivities to cost

The project is insensitive to changes in costs, including an overall low energy intensity at just 20% of annual operating costs. Against a backdrop of the expected demand strength and supply constraints for permanent magnet rare earths forecast over the next decade and beyond, Phalaborwa is expected to deliver an independent source of responsibly sourced rare earth oxides for the green revolution.

Environmental benefits

Studies at Phalaborwa have highlighted the environmental benefits of the project, which include very low levels of radioactivity (exempting Phalaborwa from radioactivity regulation) and the ability to neutralise the existing water from the stacks for reuse in a closed circuit as plant process water. In processing material from the existing gypsum stacks at Phalaborwa, we aim to remove existing environmental liabilities and redeposit benign gypsum on a new stack, built according to International Finance Corporation ("IFC") Performance Standards and Equator Principles.

Next steps

Following the publication of the PEA Rainbow intends to advance the project to feasibility study, identify all permits required for the Project to be developed, engage with the relevant authorities to expedite permitting and undertake further process optimisation tests culminating in an extensive process pilot plant operation. A resource update is also expected for Phalaborwa following drilling work undertaken in June 2022.

Gakara

The Gakara rare earths project is located in Western Burundi covering an area of approximately 135km². The project benefits from good infrastructure, with road links to Dar es Salaam, Tanzania and Mombasa, Kenya. Trial mining and processing has demonstrated that a high-grade rare earth mineral concentrate, with a 19-20% NdPr content, can be consistently produced via simple gravity separation from the narrow high-grade rare earth veins found across the Gakara license area.

Gakara was placed on care and maintenance in June 2021 at the request of the Government of Burundi, with the majority of staff placed on suspension and short-term cash requirements minimised. Rainbow continues to engage constructively with all stakeholders to resolve the issue and allow trial mining to recommence. On the expected restart of operations, Rainbow will assess the available options to move the project to commercial production

Developing sources of phosphogypsum

The successful global transition to clean energy is reliant on a considerable increase in supply of critical materials. Rainbow is focused on identifying the optimal way of producing rare earths responsibly from secondary sources, removing significant time, risk and cost from the overall project timeline.

Phosphate rock is mined all over the world, with over three quarters of global reserves located in Northern Africa. Given the prevalence of phosphate mining, phosphogypsum is available throughout the world in large volumes. This makes it an attractive secondary source of rare earth elements.

Recognising this enormous potential, our team is concentrated on securing opportunities for both collaboration and expertise sharing, as well as gaining access to new supply.

In June, Rainbow entered into a Memorandum of Understanding with a diversified chemicals group based in South Africa to investigate the opportunity of extracting rare earth elements from a nitro phosphate process stream at its phosphoric acid production plant near Johannesburg in South Africa.

Under the terms of the MoU, Rainbow is conducting a rare earths extraction pilot study with the chemicals group, involving initial grade test work on processing stream material. This will be followed by a technical programme to confirm a flowsheet using Rainbow's unique knowledge and IP.

The feedstock for the phosphoric acid production plant originates from the same ore originally mined by Foskor that generated the two gypsum stacks at Phalaborwa. Preliminary sampling of the processing stream indicates a grade of 0.81% TREO, with a circa 27% weighting to high-value NdPr, alongside economic levels of terbium and dysprosium, similar to Phalaborwa.

Direct costs associated with the pilot study utilising Rainbow's exclusive IP and technology will be financed by the chemicals group. Subject to a successful outcome, the parties intend to negotiate terms for a potential joint venture agreement to extract value from the rare earths present in the phosphoric acid processing stream.

Post Year-end, in August 2022, Rainbow entered into a Master Agreement with OCP, the Moroccan world leading producer of phosphate products, and UM6P, a Moroccan university with a strong focus on science, technology and innovation, to further investigate and develop the optimal technique for the extraction of rare earth elements from phosphogypsum.

Together with the innovative research carried out by UM6P, OCP has built up significant IP assets and expertise in the field of phosphogypsum processing. This provides a synergistic opportunity for joint development with Rainbow, given Rainbow's expertise and intellectual property on rare earths extraction and processing gained from work carried out to date at Phalaborwa. OCP and UM6P will contribute with their respective expertise, including adapted complementary separation technologies. The Parties intend to develop the optimal route for the extraction of rare earths from phosphogypsum, and the development of pilot and industrial-scale extraction of rare earths from phosphogypsum.

The recovery of rare earths from phosphogypsum arising as a residue from phosphoric acid production has been the subject of international research for many years. However, the process has proven technically, environmentally and economically challenging.

In 2022, following a robust international test work programme, Rainbow confirmed the successful development of a process flowsheet to extract rare earth elements efficiently from the phosphogypsum stacks at Phalaborwa using an innovative process developed in collaboration with K-Tech. Rainbow and K-Tech and are now in the process of jointly patenting this breakthrough.

The process flowsheet utilises existing technology, proven at a commercial scale across a number of industries, in a novel way to overcome the technical challenges associated with economically recovering the rare earth elements from the phosphogypsum. The process includes a number of simple steps to remove impurities from the phosphogypsum before leaching the rare earth elements into a high-grade pregnant leach solution. Efficient recycling of leach streams ensures reagent costs are optimised.

The high grade mixed rare earth solution is ultimately fed into a patented continuous ion exchange and continuous ion chromatography system to allow for the recovery of high purity separated magnet rare earth oxides with far fewer steps than a traditional solvent exchange process. Unlike traditional separation techniques, the process does not require the costly separation of low value products, such as cerium and lanthanum, before the high value magnet rare earth oxides can be targeted.

The production of separated magnet rare earth oxides in a single processing facility, without the need to ship significant volumes of low value or waste material between a mine, cracking plant and separation facility, also provide significant environmental and cost benefits when compared to traditional methods.

Financial Review

PROFIT AND LOSS

With Rainbow's strategic focus on processing rare earths from secondary sources, predominantly at Phalaborwa in South Africa, and the Gakara project remaining on care and maintenance throughout the year, the income statement represents the administrative costs for the Group for the year.

Income statement costs associated with maintaining the Gakara project on care and maintenance totalled US$1.3 million (FY 2021: US$0.8 million). The increase is due to the change in treatment of costs previously capitalised within exploration and evaluation assets. In FY 2021 a total of US$1.9 million was spent at Gakara, of which US$1.1 million was capitalised comprising US$0.4 million of net costs associated with trial mining and processing, US$0.3 million of depreciation on the mining fleet and US$0.4 million of direct exploration costs. With the project on care and maintenance throughout FY 2022, all costs associated with Gakara are recognised within the income statement as they do represent costs incurred to evaluate the commercial viability of extracting the mineral resource at the Gakara project. The reduced overall cost base at Gakara in FY 2022 includes costs associated with suspending staff contracts up to 31 December 2021, following which the team was reduced to a core of 22 staff to safeguard the assets and maintain the administration in country. All staff with terminated employment contracts received redundancy payments in accordance with Burundi law.

The Group's corporate costs grew in FY 2022. With the expected fast track development of Phalaborwa, the administrative structures for the Group are being strengthened, and a new administrative hub has been established in South Africa. FY 2022 costs totalled US$2.3 million, increasing from US$1.9 million in FY 2021, predominantly driven by staff costs.

Net finance costs of US$0.3 million (FY 2021: US$Nil) relate primarily to foreign exchange differences. Gains on movements between the Burundian Franc ('BIF') and US dollars, the functional currency of the Group, were offset in FY 2022 by losses on movements between GB Pounds, which the Group holds to match future expected costs, and US dollars. Finance costs also include US$0.1 million (FY 2021: US$0.1 million) associated with the FinBank loan in Burundi.

The corporation tax rate in Burundi is 30%. In the absence of taxable profit, a minimum tax is charged calculated as 1% of revenue. The tax charge in the year represents an adjustment to minimum tax from prior periods.

BALANCE SHEET

The Group balance sheet includes US$9.8 million of non-current assets at 30 June 2022 relating to Gakara, including US$8.6 million of exploration and evaluation costs and tangible fixed assets with a net book value of US$1.0 million. The Gakara cash generating unit also includes US$0.9 million of inventory, carried at cost, primarily relating to the stock of available for sale rare earth concentrate in Burundi. Whilst the Gakara project remains on care and maintenance, the Directors are confident that the issues with the Government of Burundi will be resolved, allowing the asset to recommence operations.

A total of US$0.8 million of exploration and evaluation assets were capitalised in the year relating to Phalaborwa, leaving a closing capitalised cost of US$1.9 million. The Group is earning a 70% interest in the Phalaborwa project by completing a pre-feasibility study and at the balance sheet date has no tangible fixed assets and no obligations for environmental closure at the Phalaborwa site.

The Group balance sheet includes US$0.3 million of tax receivables relating to the historic overpayment of royalties and VAT recoverable in Burundi, both measured at expected recoverable value. There are also US$0.5 million of tax and government liabilities in Burundi.

During the year, the Group significantly strengthened its balance sheet, raising US$8.5 million, net of costs, at a price of 15 pence per new Ordinary Share in October 2021. This funding allowed the Pipestone loan to be fully repaid, including accrued interest, via US$0.9 million cash and US$0.2 million equity at 15p per new Ordinary Share. The sole remaining long-term financial liability is the US$0.6 million FinBank loan in Burundi, on which capital repayments are currently being deferred. At 30 June 2022, the Group has US$4.1 million of cash which is predominantly held with Barclays Bank in London.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 June 2022

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2022