Audited annual results

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 June 2018

 

		Year ended		Year ended
		30 June		30 June
	Notes	2018		2017
		US$'000		US$'000
Revenues (prior to commercial production)	2,3	992		-
Production and other sales costs (costs prior to commercial production)	2,3	(992)		-
Administration expenses		(2,753)		(1,565)
Exploration expenditure		-		(95)
Total operating expense		(2,753)		(1,660)
Loss from operating activities	4	(2,753)		(1,660)
Finance income	5	317		414
Finance costs	5	(79)		(156)
Loss before tax		(2,515)		(1,402)
Income tax expense	8	(96)		-
Total loss after tax and comprehensive expense for the year		(2,611)		(1,402)
Total loss after tax and comprehensive expense for the year is attributable to:
Non-controlling interest	21	(45)		(13)
Owners of parent		(2,566)		(1,389)
		(2,611)		(1,402)
The results of each year are derived from continuing operations
Loss per share
Basic	9	(0.02)		(0.01)
Diluted	9	(0.02)		(0.01)

 

 

 

The accompanying notes form part of these financial statements.

 

 

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2018

 

			Year ended		Year ended
	Notes		30 June		30 June
			2018		2017
			US$'000		US$'000
Non-current assets
Exploration and evaluation assets	10		-		-
Property, plant, and equipment	11		11,249		5,791
Prepayments	13		-		182
Total non-current assets			11,249		5,973
Current assets
Inventory	12		280		-
Prepayments	13		209		22
Trade and other receivables	14		461		-
Cash and cash equivalents	15		354		3,198
Total current assets			1,304		3,220
Total assets			12,553		9,193
Current liabilities
Borrowings	16		(760)		(20)
Trade and other payables	17		(1,415)		(429)
Total current liabilities			(2,175)		(449)
Total liabilities			(2,175)		(449)
NET ASSETS			10,378		8,744
Equity
Share capital	18		16,722			13,186
Share based payment reserve	19		1,203			494
Other reserves	20		40			40
Retained loss			(7,548)			(4,982)
Equity attributable to the parent			10,417			8,378
Non-controlling interest	21		(39)			6
TOTAL EQUITY			10,378			8,744

 

 

These financial statements were approved and authorised for issue by the Board of Directors on 18 September 2018 and signed on its behalf by:

 

 

 

Martin Eales

Director

 

 

The accompanying notes form part of these financial statements.

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 30 June 2018

 

	Share capital	Share Based Payments	Other reserves	Accum- ulated losses	Attribut- able to the parent	Non-controlling interest	Total
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
Balance at 30 June 2016	5,042	-	40	(3,621)	1,461	19	1,480
Total comprehensive expense
Loss and total comprehensive loss for year	-	-	-	(1,389)	(1,389)	(13)	(1,402)
Transactions with owners
Extinguishment of convertible loan	-	-	-	28	28		28
IPO Transaction costs	(778)		-	-	(778)	-	(778)
Share Based payment reserve	-	494	-	-	494	-	494
Issue of shares during the year	8,922	-	-	-	8,922	-	8,922
Balance at 30 June 2017	13,186	494	40	(4,982)	8,738	6	8,744
Total comprehensive expense
Loss and total comprehensive loss for year	-	-	-	(2,566)	(2,566)	(45)	(2,611)
Transactions with owners
Issue of shares during the year  (note 18)	3,770	-	-	-	3,770	-	3,770
Share placing transaction costs (note 18)	(234)	-	-	-	(234)	-	(234)
Share Based payment reserve (note 19)	-	709	-	-	709	-	709
Balance at 30 June 2018	16,722	1,203	40	(7,548)	10,417	(39)	10,378

 

 

 

The accompanying notes form part of these financial statements.

 

 

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 30 June 2018

 

 

	Notes	For year ended		For year ended
		30 June		30 June
		2018		2017
		US$'000		US$'000
Cash flow from operating activities
Loss after tax for the year		(2,611)		(1,402)
Adjustments for:
Share based payment charge	19	709		494
Finance income	5	(317)		(414)
Finance costs	5	79		156
Tax expense	8	96		-
Operating loss before working capital changes		(2,044)		(1,166)
Net increase in inventory	12	(280)		-
Net increase in other receivables	14	(648)		(16)
Net increase in trade and other payables	17	938		109
Cash used by operations		(2,034)		(1,073)
Realised foreign exchange gains		294		229
Finance income	5	3		-
Finance costs	5	(19)		-
Taxes paid	8	(81)		-
Net cash used in operating activities		(1,837)		(844)
Cash flow from investing activities
Purchase of exploration and evaluation assets	10	-		(769)
Purchase of property, plant & equipment	11	(5,231)		(1,363)
Net cash used in investing activities		(5,231)		(2,132)
Cash flow from financing activities
Proceeds of new borrowings	16	740		250
Interest charge on borrowings	16	(52)		-
Repayment of borrowings	16	-		(1,700)
Payment of finance lease liabilities	22	(19)		-
Proceeds from the issuance of ordinary shares	18	3,770		7,854
Transaction costs of issuing new equity	18	(234)		(444)
Net cash generated by financing activities		4,205		5,960
Net (decrease)/increase in cash and cash equivalents		(2,863)		2,984
Cash & cash equivalents at the beginning of the year		3,198		70
Foreign exchange gains on cash and cash equivalents		19		144
Cash & cash equivalents at the end  of the year		354		3,198

 

 

 

The accompanying notes form part of these financial statements.

 

 

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 2018 and 30 June 2017 comprise the Company and its subsidiaries together referred to as the 'Group'.

 

 

2.     ACCOUNTING POLICIES

 

Basis of preparation

 

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

 

Following the successful raising of US$2 million as announced on 9 August 2018, the Company believes it has sufficient funds to allow it to continue in operation for at least 12 months from the reporting date.

 

In reaching this conclusion, the Board considered the latest cashflow forecast prepared by management for the period to 30 July 2020 which reflects increased production, considered to be conservative by management, associated with ore from new mining areas and modest production increases from Gasagwe relative to current rates.  The forecast indicates that the Company will have sufficient liquidity considering available cash, the existing overdraft facilities which are anticipated to remain available and operating cash flows.

 

In addition, the Board took into account a range of downside scenarios including: a) a fall in rare earth prices of 10% below management's expectations for market prices; b) a shortfall in production of 10%; and c) a rise in production costs of 10%. It considered that the funding required under these more conservative scenarios would be adequately covered by existing financing facilities, namely the 1.5 billion BIF (US$0.8 million) overdraft with Finbank in Burundi.

 

In the unlikely event that more than one downside scenario came to pass at the same time, the Company would consider cutting non-essential expenditure in the short term, and look to renegotiate its facility with Finbank, or indeed consider refinancing with new partners.

 

Whilst there can be no certainty that such negotiations would be successful, management believes that the probability of such a worst case scenario coming to pass is sufficiently remote, and the likelihood of being able to take mitigating actions and to renegotiate facilities sufficiently probable, that it does not consider this to be a material risk.

 

For this reason, the Board considers the Going Concern basis to be appropriate for the preparation of the accounts for the year ended 30 June 2018.

 

Standards in issue but not effective

The standards which were issued and effective for periods starting on or after 1 July 2017 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.

 

Standard	Description	Effective date
IFRS 9	Financial instruments	1 January 2018
IFRS 16	Leases	1 January 2019
IFRIC 22	Foreign Currency Translations and Advance Consideration	1 January 2018
Amendments to IFRS 2	Classification and Measurement of Share-based Payment Transactions	1 January 2018

 

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.

 

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 becomes effective for financial years beginning on or after 1 January 2018. The Group assessed the impact of this standard however based on current operations this standard do not have a material impact on the financial statements.

 

IFRS 16 Leases

The future adoption of 'IFRS 16: Leases', expected 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.  

 

Basis of consolidation

 

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.

 

Foreign currency

 

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 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces 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 has elected to early adopt IFRS 15, with effect from these financial statements.

 

IFRS 15 had no impact on prior year results as the recognition of the first sale occurred in the year.

 

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 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.

 

 

Rare earth exploration and evaluation assets

 

All exploration and appraisal costs incurred are accumulated in respect of each identifiable project area. The costs historically accumulated related to one identifiable project area, the Gakara Project. These 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.

 

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:

 

Description	Useful life
Mine development and restoration costs	Infrastructure depreciated on a life of mine unit of production basis. Mining costs depreciated on a unit of production based on the tonnes mined and estimates of tonnes contained in a specific mining area.
Plant and machinery	Life of mine unit of production basis
Vehicles	5 years
Computer equipment	3 years
Office furniture and fittings	7 years

 

 

 

 

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.

Impairment of property, plant and equipment

 

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.

 

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.

 

Inventory

 

Stockpiles of ore (whether Run of Mine 'RoM' ore, concentrate stockpiles pre-shipment, or concentrate in transit but not yet sold) are valued at the lower of historic cost and net realisable value. Historic cost is based on an allocation of mining costs and (in the case of concentrates) processing costs incurred in bringing the stockpiles to their finished condition for transportation at the period end (including plant running costs, haulage costs from the mine site to the plant, and transportation costs to the port of sale). Realisable value is based on an estimate of selling price less shipment costs, royalties, and other fees to be incurred in the course of the sales process. Inventory stockpile costs do not include an allocation of support costs.

 

Inventory spares (including tools, parts for equipment, and stocks of consumables) are also valued at the lower of historic cost and realisable value, where material. Spares are reviewed at each period end for obsolescence, with provisions applied to those stock lines whose value in use and re-sale value is uncertain.

 

Taxation

 

Current tax is based on the estimated taxable profit for the period. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

 

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding tax bases used in the computation of taxable profit. It is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

 

Convertible loan notes

 

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.

 

Where there are amendments to the contractual loan note terms that are considered to represent a significant modification to the loan note, without representing an inducement to convert, the Group treats the transaction as an extinguishment of the existing convertible loan note and replaces the instrument with a new convertible loan note.  An income statement charge is recorded based on the fair value of the new instrument attributable to extinguishing the original liability component. An adjustment to equity is recorded based on the fair value of the new instrument attributable to extinguishing the original equity component and the previous equity reserve is reclassified to accumulated loss.

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 accounted for as a hybrid financial instrument and the option to convert is an embedded derivative.

 

The embedded derivative 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.

Prior to conversion the embedded derivative is revalued at fair value. Upon conversion of the loan, the liability, including the derivative liability, is derecognised in the statement of financial position. At the same time, an amount equal to the redemption value is recognised within share capital. Any resulting difference is recognised in retained earnings.

Financial instruments

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 amount of any provision is recognised in 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 assessed to determine whether the conversion element meets the fixed-for-fixed criterion. Where this is met, the instrument is accounted for as a compound financial instrument with appropriate presentation of the liability and equity components, see accounting policy detailed 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.

 

Share capital

 

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 20.

 

Segmental reporting

 

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.

Share options

 

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 value 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 or not the market condition is satisfied, provided that all other performance and/or service conditions are satisfied.

Warrants

 

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:

 

 

Carrying value of plant, property and equipment (note 11)

 

The Group assessed at 30 June 2018 whether there was any indication that these assets may be impaired. If such indication exists, the Group estimates the recoverable amount of the asset. 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 2018, the carrying value of the Company's fixed assets was US$11.2 million. The impairment indicator review initially assessed the market capitalisation of the Company which was in excess of the carrying value of net assets.

 

In addition, as part of the impairment indicator assessment, management have reviewed the life of mine plan and its associated future discounted cash flows which involves a number estimates and assumptions.  This model supports the carrying value and demonstrated significant headroom, but involves estimates of rare earth reserves and resources with reference to internal geological data, future production, estimates of market prices realisable by the mine, operating and capital costs associated with the project and discount rates.

 

The discount rate used to determine the net present value of future cashflows was 12%, which was felt to be an appropriate rate in view of the overall risk profile of the project.

 

The model assessed for the purposes of identifying potential impairment indicators was prepared using production targets based on estimated deposits of rare earths within the Gakara permit area from specific sites. The amount of geological evidence to support these assumptions varies, with some deposits (such as Gasagwe and Murambi) relatively well-understood, with others (such as Gomvyi and Kiyenzi) relying on assumptions and a broader range of evidence. For all deposits, the evidence used to determine assessment of the size of resource included measurement of exposed veins at surface (eg through trenching) or at depth (eg through mining), drilling results, ground gravity surveys, airborne radiometric surveys, and the discovery of in situ outcrops and boulders at surface. 

 

Activity to understand further these deposits is ongoing, however even in the event that assumptions about individual deposits prove optimistic, the wide range of future targets give management confidence that sufficient rare earth mineralisation exists to support the assumption that the mine will continue in production for at least 10 years.

 

Management therefore concluded that these facts did not indicate that a trigger for impairment existed and no impairment was recognised.

 

 

Commercial production

 

During the period, the Company completed the construction and commissioning of the Gakara plant, and entered into the ramp-up phase, a period during which the production of concentrate increases until commercial levels are reached.

 

Prior to reaching commercial production levels, eligible production costs incurred as part of bringing the mine into production are capitalised, and margin generated on revenue is deducted from the carrying value of property, plant and equipment.

 

Judgement is required with respect to the point at which commercial production is deemed to have been reached.

 

Although the Kabezi plant was commissioned in March 2018, commercial production was not deemed to have been reached during the year, as the mine as a whole had not reached levels of production which might have indicated that the ramp-up phase was substantially complete.

 

The reason for the slow ramp-up of ore production lay in the establishment of efficient mining procedures, and the acquisition of mining equipment (in particular excavators and haul trucks) appropriate to maintain a rate of stripping commensurate with commercial production rates. In the case of the Gasagwe mining area, the target ore production rate was achieved for the first time in June 2018 (prior to which, the rate was approximately half this level).

 

In addition, the performance test for the plant was successfully completed in July 2018, with full operation of the plant handed over to Rainbow by Obsideo, the contractors responsible for its design and construction.

 

Accordingly, management considered these factors and concluded that commercial production had not been reached until July 2018, and therefore net revenues in the period of US$1.0 million have been offset by production costs in the income statement, and remaining production costs of US$0.3 million have been capitalised under mine development assets.

 

Share based payments (note 19)

 

Share based payments relate primarily to share options issued by the Company, in relation to employee share benefit schemes. The grant date fair value of such options are 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.

 

 

 

IPO related costs in prior year

 

Costs associated with the IPO in the prior year included both costs that were directly attributable to the share placing which has been recorded as a deduction against equity, costs directly attributable to the IPO process excluding the share placing, which have been expensed and costs which supported both the listing of existing shares and the new equity placing.  These latter costs have been allocated between the two categories based on the ratio of new share issues versus the enlarged shares in issue post IPO.  The ratio applied and the allocation of such costs required judgment.  In total US$0.3 million of costs were expensed in the year ended 30 June 2017 and US$0.8 million of costs were deducted from equity. 

 

Transfer to plant, property and equipment in prior year

 

On 30 June 2017 the Group transferred the Gakara Project exploration and evaluation asset to mine development costs.  The determination that the project had reached a stage of being commercially viable and technically feasible for extraction notwithstanding its classification as an Exploration Target under JORC rules represented a key judgment.  In forming this judgment, the Board considered factors including: a) the mine permit had been awarded; b) the Project had secured funding for development and construction of the plant; c) the production phase due to commence in Q4 2017 is anticipated to be profitable and cash generative; d) the mine development plan had been established; and e) the results of exploration data including internal and external assessments.

 

Decommissioning, site rehabilitation and environmental costs

 

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 2018 and concluded that a provision of US$60k should be recognised in respect of future rehabilitation obligations at Kabezi and Gasagwe.

 

Royalty receivables

 

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

 

4.     LOSS FROM OPERATING ACTIVITIES

 

Operating loss includes:

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
Share based payment	(709)		(494)
Audit of the Group and Company financial statements	(89)		(42)
Professional fees in relation to the IPO	-		(284)
Non-audit and audit related service fees	(2)		(87)

 

 

5.     FINANCE INCOME AND COSTS

 

FINANCE INCOME

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
Interest received	3		-
Foreign exchange gains	314		229
Gain on extinguishment of convertible loan notes	-		185
Total finance income	317		414

 

US$0.2 million of foreign exchange gains previously reported within administration costs in 2017 have been reclassified to finance income for comparability to 2018 and reflect the nature of the underlying transactions.

 

FINANCE COSTS

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
Bank charges	19		-
Interest on finance lease	8		-
Effective interest charge on borrowings	52		128
Fair value movement in derivative and interest charge on convertible loan notes	-		28
	79		156

 

The interest charge during the year related primarily to the overdraft with Finbank which carries an interest rate of 14%. The foreign exchange gain of US$314k mainly related to the revaluation of GBP funds held in the year.

 

The interest charge in the prior year related to the Pala loan facility, which was repaid in 2017. The credit in the prior year of US$185k recognised on repayment of that loan related to interest and fees which had been accrued for but which were released following the negotiation of a final settlement figure of US$1.7 million.

               

6.     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 2017 and 30 June 2018 is summarised as follows:

 

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
Wages and salaries	1,119		693
Benefits	44		15
Share based payments	689		483
Total remuneration of key management personnel	1,852		1,191

 

Benefits paid to employees include healthcare and pension contributions.

 

 

 

 

 

 

 

7.     TOTAL EMPLOYEE REMUNERATION (INCLUDING KEY MANAGEMENT PERSONNEL)

 

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
Wages and salaries	1,917		877
Benefits	81		20
Share-based payments	709		494
Total employee remuneration	2,707		1,391
The average number of employees during the period were made up as follows:
Directors	6		5
Management and administration	7		7
Mining, processing and exploration staff	211		16
	224		28

 

The increase in staff numbers reflects the recruitment of workers at the Gakara project during the year.

 

 

8.     INCOME TAX EXPENSE

 

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
Withholding tax	93		-
Current tax expense	3		-
Deferred tax expense	-		-
Total tax expense for the year	96		-

 

The tax expense for the year primarily relates to the cost of withholding tax on inbound goods and services in Burundi. US$81k was paid during the year in respect of the above taxes.

 

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:

 

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
Loss for the year	(2,611)		(1,402)
Income tax using the Guernsey rate of 0% :	-		-
Effects of:
Differences in tax rates	(292)		(163)
Tax losses carried forward	292		163
	-		-

 

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$2k (30 June 2017: US$1k), Rainbow Burundi SPRL US$104k (30 June 2017: US$103k), and in respect of Rainbow Mining Burundi SM they are US$186k (30 June 2017: US$60k).

                          

 

9.     LOSS PER SHARE

 

The earnings per share calculations for 30 June 2018 reflect the changes to the number of ordinary shares during the period.

 

At the start of the year, 154,626,472 shares were in issue. On 19 December 2017, a further 20,000,000 shares were allotted as part of the share placing at that date, followed by 134,000 shares issued to satisfy the exercise of employee share options. The weighted average of shares in issue in the year was therefore 165,258,477.

 

Earnings per share have been calculated using the weighted average of ordinary shares, adjusted for the effect of the share subdivision at the time of the IPO. 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.

 

 

	Weighted number of ordinary shares
At 30 June 2017	112,135,616
At 30 June 2018	165,258,477

 

		Basic		Diluted
		2018	2017	2018	2017
Loss for the year (US$'000)		(2,611)	(1,402)	(2,611)	(1,402)
Weighted average number of ordinary shares in issue during the year		165,258,477	112,135,616	165,258,477	112,135,616
Loss per share (cents)		0.02	0.01	0.02	0.01

 

 

10.  EXPLORATION AND EVALUATION ASSETS

 

	Total
	US$'000
At 1 July 2016	3,827
Additions in year	776
Transfer to plant, property and equipment	(4,603)
At 30 June 2017	-
Additions in year	-
At 30 June 2018	-

 

At 30 June 2017, the total value of exploration costs previously capitalised as intangible assets in respect of the Gakara project were transferred to plant, property and equipment, in accordance with the Company's accounting policies.

 

 

 

11.  PROPERTY, PLANT, AND EQUIPMENT

 

US$'000	Mine development costs	Plant & machinery	Vehicles	Office equipment	Mine restoration	Total
Cost
At 1 July 2017	4,603	1,016	169	3	-	5,791
Additions	2,909	1,649	540	21	60	5,179
Production costs prior to commercial production	279	-	-	-	-	279
At 30 June 2018	7,791	2,665	709	24	60	11,249
Depreciation
At 1 July 2017	-	-	-	-	-	-
Charge for year	-	-	-	-	-	-
At 30 June 2018	-	-	-	-	-	-
Net Book Value at 30 June 2018	7,791	2,665	709	24	60	11,249
Net Book Value at 30 June 2017	4,603	1,016	169	3	-	5,791

 

Included under additions to mine development costs in the period were US$366k in respect of the brownfield exploration and development of new mining areas (including Murambi and Kiyenzi) within the Gakara permit. The remaining additions to mine development relate to the Gasagwe mining area, together with infrastructure, compensation, and access route costs for the overall project.

 

Commercial production was not deemed to have been reached until July 2018 (see note 3 Accounting Judgements and Estimates). Accordingly, eligible production costs prior to this have been capitalised in the year, and net revenues treated as a deduction to property, plant and equipment. The net impact of these was an addition of US$279k to mine development costs.

 

From July 2018, production costs and revenues will flow through the income statement, and depreciation will be charged in accordance with the Company's accounting policies.

 

For the same reasons, no depreciation charge was applied during the year.

 

During the prior year, capitalised costs of US$4.6 million, which had previously been classified under intangible assets, were transferred to tangible fixed assets (see note 10 above).

 

 

 

US$'000	Mine development costs	Plant & machinery	Vehicles	Office equipment	Mine restoration	Total
Cost
At 1 July 2016	-	-	-	1	-	1
Transfers from exploration and evaluation assets	4,603	-	-	-	-	4,603
Additions	-	1,016	169	2	-	1,187
At 30 June 2017	4,603	1,016	169	3	-	5,791
Depreciation
At 1 July 2016	-	-	-	-	-	-
Charge for year	-	-	-	-	-	-
At 30 June 2017	-	-	-	-	-	-
Net Book Value at 30 June 2017	4,603	1,016	169	3	-	5,791
Net Book Value at 30 June 2016	-	-	-	1	-	1

 

 

12.  INVENTORY

 

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
WIP	71		-
Finished goods	177		-
Consumables	32		-
Total inventory	280		-

 

WIP (Work in Progress) represents ore undergoing treatment at the Kabezi processing plant, while Finished Goods relate to concentrate that has been produced but not yet sold at year end. In accordance with accounting policies, both WIP and Finished Goods are valued at the lower of cost of production and net realisable value.

 

Consumables mainly relates to fuel stocks at 30 June 2018.

 

13.  PREPAYMENTS

 

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
Non-current prepayments	-		182
Current prepayments	209		22
Total prepayments	209		204

 

Current prepayments relate to prepaid operating expenses and include US$146k 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, pending the conclusion of a report commissioned by the World Bank into the reasonableness of the discount received by Rainbow.

 

 

 

14.  TRADE AND OTHER RECEIVABLES

 

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
VAT recoverable	85		-
Sales proceeds receivable	376		-
Total trade and other receivables	461		-

 

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

 

Sales proceeds receivable represent the cash due from the sale of concentrate which took place before 30 June 2018, but for which cash was not received until after year end.

 

15.  CASH AND CASH EQUIVALENTS

 

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
Cash at bank and in hand	354		3,198
Total cash at bank and in hand	354		3,198

 

No cash amounts were restricted at 30 June 2018 (30 June 2017: nil).

 

16.  BORROWINGS

 

		Year Ended		Year Ended
		30 June 2018		30 June 2017
		US$'000		US$'000
Current
Bank borrowings		738		-
Other borrowings		22		20
Total borrowings		760		20

 

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 agreed in October 2017, initially on a six-month term rolling thereafter, it has been classified as a short term liability. 

 

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. Bank borrowings include US$52k of interest, which is non-cash.

 

 

17.  TRADE AND OTHER PAYABLES

 

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
Trade payable	535		61
Accrued expenses	355		64
Payroll  and withholding taxes	31		17
Amounts due to staff and management	368		135
Pension contributions	3		10
Amounts owed to shareholders	-		126
Rehabilitation provision	60		-
Other payables	63		16
Total trade and other payables	1,415		429

 

Trade payables and accrued expenses relate to the ongoing operating costs of the mine, which came into production during the year. Accrued expenses include US$130k to Obsideo Consulting (Pty) Ltd in relation to the construction of the plant at Kabezi.

 

Amounts due to staff and management include a group bonus accrual.

 

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.  SHARE CAPITAL

 

		Year Ended		Year Ended
		30 June 2018		30 June 2017
		US$'000		US$'000
Share Capital		16,722		13,186
Issued Share Capital (nil par value)		16,722		13,186

 

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

 

		Number of shares		Value (US$'000)
At  30 June 2017		154,626,472		13,186
December 2017 - share placing		20,000,000		3,516
April 2018 - shares issued for exercise of share options		134,000		20
At  30 June 2018		174,760,472		16,722

 

 

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

 

 

The table below shows a reconciliation of share capital movement for the year ended 30 June 2017:

 

	Note	Number of shares		Value (US$'000)
At 30 June 2016		1,221,826		5,042
January 2017 - 1:67 share subdivision	a	80,640,516		-
January 2017 - share allotments to settle debt and other creditors	b	5,126,507		602
January 2017 - share allotment as part of IPO	c	65,036,958		8,000
January 2017 - IPO costs relating to new shares	d	-		(778)
February 2017 - share allotments	e	2,600,665		320
At  30 June 2017		154,626,472		13,186

 

a.     On 9 January 2017, the Company subdivided each of its existing ordinary shares (1,221,826) into 67 ordinary shares (81,862,342).

b.     On 30 January 2017, the Company issued 2,868,151 ordinary shares at 10p (12.3 cents) per share to various creditors and key management personnel shown below to settle amounts owing. On the same day, it also issued 2,258,356 ordinary shares to Alpha Future Investments at a discounted price of 9p (11.1 cents) per share on the conversion of its loan as explained below.

 

 

	No of shares	US$'000
Cesare Morelli*	612,559	75
Gilbert Midende*	746,647	91
Martin Eales*	786,579	96
Alpha Future Investments	2,258,356	250
Other creditors	722,366	90
	5,126,507	602

 

On 17 October 2016 the Group entered into a loan agreement with Alpha Future Investments to fund working capital and expenditure requirements. Upon entering into the agreement the Group issued US$0.25m of convertible loan notes, which were convertible upon IPO at a 10% discount to the IPO price. If the IPO had not completed before 31 January 2017 Alpha could elect to convert the loan at a 20% discount to the IPO price or continue to extend the loan on an unsecured basis on which interest would accrued at 13% per annum from 1 February 2017.  The principal and accrued interest would be due for repayment on 31 January 2019.

 

The terms of the agreement were such that a variable number of shares could be issued.  The option to convert to a variable number of shares represented an immaterial embedded derivative.  The IPO on 30 January triggered conversion of the loan notes.  Prior to conversion the embedded derivative was fair valued. The loan liability was converted into 2,258,356 new ordinary shares at the placing price of $0.11 (£0.09) in accordance with the agreed terms noted above. The loan note and embedded derivative were derecognised and included in equity. At the date of conversion no loan interest had accrued in line with the agreement.

 

c.     On 30 January 2017, the Company successfully listed on the London Stock Exchange (RBW: LSE) and issued 65,036,958 ordinary shares at admission price of 10p (12.3 cents) per share raising US$8m share capital (the Group incurred US$0.15m in foreign exchange following the settlement of the funds).

d.     Costs in relation to the allotment of new shares as part of the IPO amounted to US$778k. This amount was set off against share capital.

 

e.     On 2 February 2017, the Company issued 2,600,665 ordinary shares for commissions and early subscription discounts in relation to the issuance of the 65 million shares, as follows:

 

	No of shares	US$'000
Early subscription discounts
Alexander Lowrie (including related parties)*	333,333	41
Other members of Lowrie family	627,776	77
	961,109	118
Commissions
Alexander Lowrie*	380,126	47
Atul Bali*	339,430	42
Other commissions	920,000	113
	1,639,556	202
	2,600,665	320

 

* transactions with related parties

 

 

19.  SHARE OPTIONS AND WARRANTS

 

Employee share options

 

A total of 9,692,400 share options had been issued at 30 June 2017, in two tranches: 6,692,400 on 30 January 2017 at a grant price of 10 pence, and 3,000,000 share options on 27 June 2017 at a grant price of 12.75 pence.

 

On 23 August 2017, a further 2,500,000 options were awarded to the non-executive board members, at a grant price of 15.00 pence, a premium of 35% to the share price of 11.13 pence at the date of award.

 

	Options held at 30 June 2017	Exercised/ cancelled during the period	Granted during the period	Options held at 30 June 2018	Exercise price (pence)	Date of grant	Date from which first tranche exercisable (see below)
A Pouroulis	402,000	-	-	402,000	10.00	30-Jan-17	30-Jan-17
A Pouroulis	-	-	500,000	500,000	15.00	23-Aug-17	23-Aug-17
R Sinclair	350,000	-		350,000	10.00	30-Jan-17	30-Jan-17
R Sinclair	-	-	500,000	500,000	15.00	23-Aug-17	23-Aug-17
A Lowrie	-	-	500,000	500,000	15.00	23-Aug-17	23-Aug-17
A Bali	-	-	500,000	500,000	15.00	23-Aug-17	23-Aug-17
C Morelli	944,700	-	-	944,700	10.00	30-Jan-17	30-Jan-17
G Midende	944,700	-	-	944,700	10.00	30-Jan-17	30-Jan-17
M Eales	3,500,000	-	-	3,500,000	10.00	30-Jan-17	30-Jan-17
S McCormick	350,000	-	-	350,000	10.00	30-Jan-17	30-Jan-17
S McCormick	-	-	500,000	500,000	15.00	23-Aug-17	23-Aug-17
J Wynn	1,500,000	-		1,500,000	12.75	27-Jun-17	27-Jun-17
B Jankowitz	1,500,000	-		1,500,000	12.75	27-Jun-17	27-Jun-17
Others	201,000	(134,000)		67,000	10.00	30-Jan-17	30-Jan-17
	9,692,400	(134,000)	2,500,000	12,058,400	11.72

 

 

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.

 

4,333,333 share options awarded to M Eales, J Wynn and B Jankowitz during the year ended 30 June 2017 are subject to performance conditions (on tranche 2 and 3 above) related to safety, and operational and strategic targets, which are required to be met if exercise of vested options are to be permitted by the Remuneration Committee. 

 

At 30 June 2018, the following share options are exercisable and outstanding:

	Number	Average weighted exercise price	Fair value (US$'000)
Outstanding at 1 July 2017	9,692,400	10.85 pence	1,140
Granted during the year	2,500,000	15.00 pence	262
Exercised in the year	(134,000)	10.00 pence	(15)
Cancelled or expired in the year	-	-	-
Outstanding  at 30 June 2018, of which:	12,058,400	11.72 pence	1,387
-       Exercisable	7,160,929	11.35 pence	832
-       Not exercisable	4,897,471	12.26 pence	555

 

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 2018, the following share warrants were outstanding:

	Number	Exercise price	Fair value (US$'000)
Outstanding at 1 July 2017	427,924	US$0.21	40
Movement in the year	-	-	-
Exercisable at 30 June 2018	427,924	US$0.21	40

 

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:

	Share Options awarded 23 August 2017	Share Options awarded 27 June 2017	Share Options awarded 30 January 2017	Warrants
Share price (GBP)	0.1113	0.1275	0.1162	10.83
Exercise price (GBP)	0.15	0.1275	0.10	10.83
Expected volatility	90%	90%	90%	50%
Risk‑free rate	0.71%	0.85%	0.79%	1.8%
Rate of Exchange	1.28	1.30273	1.23	1.32
Contractual life (years)	7	7	7	5

 

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.

 

20.  RESERVES

 

Reserve	Purpose
Share capital	Value of shares issued less costs of issuance
Share-based payment reserve	Fair value of share options issued
Equity reserve	Fair value of proceeds on the issue of convertible debt attributable to the equity conversion component i.e. the option to convert the debt into share capital, less amounts removed from the reserve on extinguishment of the convertible loan note
Other reserves	Includes fair value of warrants issued
Accumulated losses	Cumulative net losses recognised in the statement of comprehensive income
Non-controlling interest	Amounts attributable to the 10% interest the State of Burundi has in Rainbow Mining Burundi SM and 3% interest Gilbert Midende has in Rainbow Burundi SPRL at 30 June 2018. Refer to note 21 for further details and non-controlling interests for earlier periods

 

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

 

 

21.  NON-CONTROLLING INTEREST

 

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

 

Name of subsidiary	Rainbow Burundi SPRL	Rainbow Mining Burundi SM
Country	Burundi	Burundi
	US$'000	US$'000
Effective non-controlling interest 2017	3%	10%
As at 1 July 2016	5	(24)
Loss for year	1	12
At 30 June 2017	6	(12)
Effective non-controlling interest 2018	3%	10%
As at 1 July 2017	6	(12)
Loss for year	-	45
At 30 June 2018	6	33
Assets at year-end:
30 June 2017	1,229	2,358
30 June 2018	1	11,657
Liabilities at year-end:
30 June 2017	1,539	2,237
30 June 2018	313	11,958
Loss for the year to:
30 June 2017	20	123
30 June 2018	2	450

 

 

22.  FINANCE LEASES

 

In June 2017, the Company agreed the terms of a finance lease contract with G Midende (a PDMR and a related party, see note 24 below) for land situated in Kabezi at the site of the processing plant. This agreement came into effect in July 2017 and has been recognised as a finance lease obligation during the period as follows:

 

	2018		2017
	Minimum Payments	Present Value of payments	Minimum Payments	Present Value of payments
	US$'000	US$'000	US$'000	US$'000
Within one year	18	17	-	-
After one year but not more than five years	36	26	-	-
More than five years	-	-	-	-
Total minimum lease payments	54	43	-	-
Less amounts representing finance charges	(11)	-	-	-
Present value of minimum lease payments	43	43	-	-

 

US$19k was paid during the year in respect of the above lease.

 

23.  CAPITAL COMMITMENTS

 

At 30 June 2018, the Company had an obligation to make payments of US$0.1 million (2017: US$0.8 million) to Obsideo Consulting (Pty) Ltd for the design, supply and installation of the processing plant at Kabezi.

 

 

24.  RELATED PARTY TRANSACTIONS

 

	2018		2017
	Charged in year	Balance as at 30 June	Charged in year	Balance as at 30 June	Related party	Description
	US$'000	US$'000	US$'000	US$'000
Artemis Trustees Limited	31	-	56	76	R Sinclair	Company secretarial services to the Group
Alexander Lowrie	-	-	88	-	A Lowrie	Shares allotted as underwriting discount
Atul Bali	-	-	42	-	A Bali	Shares allotted for equity raised
Gilbert Midende	44	2	34	2	G Midende	Rental of accommodation for staff, plus acquisition of land for plant site
Martin Eales	-	-	-	122	M Eales	Balance of settlement for waiver of profit-share agreement
Pella Resources Limited	-	-	20	43	A Pouroulis	London office rental
Uvumbuzi Resources Limited	110	-	54	8	C Morelli	Exploration activity
Benzu Minerals	18	-	12	-	C Morelli	Exploration activity
	203	2	306	251

 

·      During the prior year, shares were issued in order to settle commissions due to Atul Bali for bringing investors into the IPO, and to Alexander Lowrie as a discount for committing early to the fundraising.

·      The US$122k due to Martin Eales at the prior year end relates to the unsettled amount in respect of his waived entitlement to a profit-share agreement under his previous contract which was settled in the current year.

·      Remuneration with key management personnel has been disclosed in note 6.

 

 

25.  INVESTMENT IN SUBSIDIARIES

 

The shareholdings in the Group's subsidiaries for each year are set out below:

 

Name of Company	Principal Activity	Country of Incorporation	% Share Capital Held
			2018	2017
Rainbow International Resources Ltd	Rare earth exploration	British Virgin Islands	100%	100%
Rainbow Rare Earths UK Ltd	Service Company	United Kingdom	100%	100%
Rainbow Burundi SPRL	Rare earth exploration	Republic of Burundi	97%	97%
Rainbow Mining Burundi SM	Rare earth mining	Republic of Burundi	90%	90%

 

a.     Rainbow International Resources Limited is 100% owned by Rainbow Rare Earths Limited.

b.     Rainbow Rare Earths UK Ltd is 100% owned by Rainbow Rare Earths Limited.

c.     97% of shares in Rainbow Burundi SPRL and 90% of shares in Rainbow Mining Burundi SM are held by Rainbow International Resources Limited.

d.     The government of Burundi has a 10% interest in Rainbow Mining Burundi SM granted in accordance with the Mining Code of Burundi.

e.     Gilbert Midende holds a 3% interest in Rainbow Burundi SPRL.

 

26.  CONTINGENT LIABILITIES

 

There were no contingent liabilities at 30 June 2018 (30 June 2017: nil).

 

 

27.  POST BALANCE SHEET EVENTS

 

On 9 August 2018, the Company concluded a placing of approximately 13 million new shares at a price of 12 pence per share, raising gross proceeds of approximately US$2 million.  

 

 

28.  FINANCIAL RISK MANAGEMENT

 

The Group's financial liabilities at each period end consist of borrowings, related party loans and trade and other payables. All liabilities are measured at amortised cost. These are detailed in notes 16 and 17.

 

The Group has various financial assets, being trade and other receivables and cash, which arise directly from its operations. All are classified as cash or receivables. These are detailed in notes 14 and 15.

 

The fair values of the Group's cash, other receivables, borrowings, and trade and other payables are considered to approximate book value.

 

The risks arising from the Group's financial instruments are credit risk, liquidity risk and market risk (including interest risk and currency risk). The risk management policies employed by the Group to manage these risks are discussed below:

Credit risk

 

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group does not have any significant credit risk exposure.

 

The Group makes allowances for impairment of receivables where there is an identified event.

 

The credit risk on liquid funds (cash) is considered to be limited because the counterparties are financial institutions with high and good credit ratings assigned by international credit rating agencies in the UK and Burundi.

 

The carrying amount of financial assets, other receivables and cash held with financial institutions recorded in the financial statements represents the maximum exposure to credit risk for the group. There are no material past due unimpaired financial assets.

Market risk

 

-       Currency risk

 

Currency risk refers to the risk that fluctuations in foreign currencies cause losses to the Group.

 

The Group is exposed to foreign exchange risk arising from various currency exposures primarily with respect to Sterling and the Burundian Franc. However, management monitors the exchange rate fluctuations on a continuous basis and acts accordingly. The financial assets and liabilities that include significant foreign currency denominated balances are shown below.

 

Cash and cash equivalents

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
US dollars	100		1,250
GB pounds	252		1,937
Burundi Francs	2		11
	354		3,198

 

Trade and other payables

	Year Ended		Year Ended
	30 June 2018		30 June 2017
	US$'000		US$'000
South African Rand	104		5
GB pounds	113		320
Burundi Francs	321		42
	538		367

 

A 10% movement in the US$:GBP rate would have resulted in a gain or loss of less than US$0.1m (2017: US$0.2m) in the income statement in relation to the cash and cash equivalents as at 30 June 2018.  

 

-       Interest rate risk

 

Interest rate risk refers to the risk that fluctuations in interest rates cause losses to the Company.

 

The Group and Company have no exposure to interest rate risk except on cash and cash equivalent which carry variable interest rates. The Group has no material sensitivity to reasonable changes in variable interest rates. The group monitors the variable interest risk accordingly. 

 

The Group's borrowings bear fixed rates of interest. 

 

Liquidity risk

 

Liquidity risk refers to the risk that the Group has insufficient cash resources to meet working capital requirements. The Group manages its liquidity requirements by using both short and long-term cash flow projections. All liabilities are deemed to be short-term as none have repayment maturities beyond 12 months.

 

Ultimate responsibility for liquidity risk management rests with the Directors, who have built an appropriate liquidity risk management framework for the management of the Group's short, medium and long-term funding and liquidity management requirements. The Group closely monitors and manages its liquidity risk. For further details on the Group's liquidity position, please refer to the going concern paragraph in Note 2 of these accounts.

 

Capital management

 

In managing the capital, the Group's primary objective is to maintain a sufficient funding base, through debt and equity, to enable the Group to meet its working capital and strategic investment needs.  In making decisions to adjust its capital structure to achieve these aims the Group consider not only its short term position but also its long term operational and strategic objectives.

 

The Group's primary capital management measure is net debt (borrowings less cash) to total equity, measured as follows:

 

Net debt/(net cash) to equity	30 June 2018	30 June 2017
	US$'000	US$'000
Total borrowings (note 16)	760	20
Less: Cash and cash equivalents (note 15)	(354)	(3,198)
Net debt/(net cash)	406	(3,178)
Total equity	10,378	8,744
Ratio	4%	-36%

 

29.  NON-CASH TRANSACTIONS

 

Material non cash transactions were as follows:

 

Year end 30 June 2017

·    The difference between cash additions to exploration and evaluation costs and note 10, representing movements in capital accruals

·    The difference between cash additions to property, plant and equipment and note 11, representing movements in capital accruals

·    Finance costs and the finance income as detailed in note 5

·    Share based payments, which have been recognised in income statement

·    Shares issued in settlement of liabilities, shares issued for commissions and early settlement discounts per note 19.

 

Year end 30 June 2018

·    The difference between amounts shown in the cash flow statement and finance costs and the finance income as detailed in note 5

·    Share based payments, which have been recognised in income statement

 

30.  ULTIMATE CONTROLLING PARTY

 

The Company does not have a single controlling party.

 

BUSINESS RISKS 

 

The Directors regularly assess and discuss the principal risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity.

 

The key risks affecting the Company are set out below:

 

Risk	Comment	Business impact	Mitigation
Production issues	The production of rare earth mineral concentrate involves a series of processes, from the mining of the ore at the mine site near Mutambu, to the processing of material at the Kabezi plant.   Mining operations are subject to a number of risks, including mechanical outages, supply issues (eg fuel), interruptions due to weather and soil conditions, among many others.	High	Management will monitor ongoing risks as far as possible to mitigate potential issues arising which might impact production. The Executive Committee ('Exco') convenes weekly to discuss current concerns, and monthly reports are shared with the Board which highlight the key issues facing operations.
Geological risk	The Company does not currently have a code-compliant Mineral Resource or Reserve, and therefore the scale of its mineral deposit cannot be stated with certainty.   It is possible that the quantity of rare earths present in the licence area is less than management expectations with resulting impacts on production in the short and longer term.	High	Rainbow's models are considered by the Board to be based on conservative assumptions of the quantity and size of rare earth veins within the Gakara licence area. The Company has continued its brownfield exploration activities to improve its understanding of the orebody, to minimise this risk.   In addition, the Company intends to conclude exploration work which will enable the publication of a code-compliant Resource in Q4 2018.
Rare earth prices	The Company produces rare earth mineral concentrate which is sold to TK on market price less a deductions and a discount (negotiated by TK with each end customer).   Rare earth prices have been volatile in the past. If the underlying rare earth basket price falls, this reduces revenue and will impact the profitability of the mine.   The current discount rate is approximately 70%, however may vary with dependent on the arrangements ThyssenKrupp negotiates with any new customers or as terms are renegotiated.	High	In the event of lower market prices, the Company would seek to defend its margins by reviewing its operating cost base, where possible, and cut back on discretionary expenditure.   Under the terms of the Offtake and Distribution agreement, TK is responsible for negotiating terms with its end customers, which are the ultimate consumers of the Company's concentrate, and is incentivised to obtain the best price through its exposure to risks and rewards of ownership once it obtains title to the concentrate.
Soil instability in mining areas and/or access routes	Heavy rains during the rainy season (Oct-May) can lead to land slippages, which could lead to production interruption in the event that these impacted the mining areas or access routes	Medium	Mitigation of these risks occurring in pit involves proper mine design and slope stabilities to prevent highwall failures.   More widely, the Company will continue to explore methods to mitigate soil erosion (eg by planting trees, building culverts, maintaining drainage channels etc)
Civil unrest	Burundi has experienced civil unrest, including most recently in 2015. Any subsequent instances of civil unrest could impact the operation of the mine, including its ability to obtain supplies or export its material, or even access its bank accounts in country.	Medium	Although civil unrest is beyond the control of management, the Company maintains strict political neutrality in order to minimise the risk of association with any party.   In the event of unrest, management would prioritise the safety of its staff, and if it were deemed safe to continue in operation, would work to ensure the security of its assets and supplies.
Financing risk	The Company currently forecasts that it will have adequate headroom to continue in operations. However, in the event that one or more negative scenarios come to pass (such as commodity prices, or production problems), then additional financing may be necessary.	Medium	Management maintains strong relationships with key sources of finance, including its bankers Finbank, its existing shareholders and the wider equity markets in the UK and beyond, as well as a range of finance boutiques who have proposed more exotic financing instruments.   The Company also prepares regular forecasts in addition to an annual Budget, which are frequently reviewed by management and by the Board of Directors.
Currency controls	The Company receives proceeds in US dollars, which, are repatriated to an account in the Burundi Central Bank.   Burundi has experienced shortages of foreign currency reserves in the past, and it is therefore possible that access to US dollars held in country might be difficult. This would affect the Company's ability to meet ongoing foreign currency obligations (eg corporate costs, and any debt payments in US dollars).	Medium	The Company has the right, under its Mining Convention with the Burundian Government, to have unfettered access to its foreign currencies.   The Company will continue to monitor currency issues in country, and will negotiate flexible terms with the Government as far as possible.