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ONE OF THE WORLD’S RICHEST
RARE EARTH DEPOSITS
Rainbow Rare Earths Limited
Annual Report & Accounts
for the year ended 30 June 2017
Designed & produced by
wren-design.co.uk
Introduction and Highlights
Gakara at a Glance
Gakara Development Schedule
Rare Earths – Technology Metals
Health and Safety
Corporate and Social Responsibility
Chairman’s Statement
Chief Executive Officer’s Review
Operations Review
Financial Review
Directors’ Report
Board of Directors
Senior Management
Business Risks
Corporate Governance
Independent Auditors’ Report
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Changes in Equity
Consolidated Cash Flow Statement
Notes to the Financial Statements
Directors and Advisers
Discover more online
For the latest news and investor information, visit the
company’s website at www.rainbowrareearths.com
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STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSRainbow Rare Earths Group Anual Report & Accounts 30 June 2017OVERVIEW OVERVIEW
Rainbow Rare Earths (LSE:RBW) is focused on
bringing the Gakara Project in Burundi, one of
the highest grade rare earth projects globally,
into production in Q4 2017.
Gakara boasts exceptionally high grade
Rare Earth Elements (‘REEs’) with
an in-situ grade of between 47-67%
Total Rare Earth Oxides (‘TREOs’)
(compared to the industry average
of approximately 5% TREO), a JORC
‘exploration target’ of 20,000-80,000
tonnes of vein material with significant
exploration upside, simple and low-
cost mining and processing routes,
together with a basket strongly
weighted towards magnet rare earths.
This positions Gakara as a strategically
important and economically robust
mining asset poised to commence
production imminently. It also provides
investors with a rare opportunity to
gain quality exposure to an industry
at a time of growing demand for new
sources of REEs, which are vital to
some of the world’s fastest growing
markets including renewable energy,
electric vehicles, telecommunications
and defence.
With production and
sales of
concentrate targeted for Q4 2017
through its distribution and offtake
partner thyssenkrupp Raw Materials,
Rainbow will be entering the REE
market with an exceptional product,
with low capital intensity, considerable
exploration upside and strategic
significance as a non-Chinese supplier
– providing investors with unique
exposure to the high growth REE
industry.
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Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 2016-17 HIGHLIGHTS
Listed on the London
Stock Exchange in
January 2017
Raised
US$8 million
to fund the Gakara
Project in Burundi
Developing one of the world’s
highest grade rare earth projects
47-67% TREO
Fully permitted
project
aiming for production and
sales within first year of IPO
Straightforward &
low cost mining
and processing routes selected
Construction
underway
On track for production
and sales in Q4 2017
Gasagwe mine site July 2017
3
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 Rainbow Rare Earths Group
Anual Report & Accounts 30 June 2017
GAKARA AT A GLANCE
Location
Production Rate
Mining Areas: 35km by road from
Bujumbura, Burundi’s capital city
Targeting run rate of 5,000tpa by the
end of 2018
Processing Plant: 13km South of
Bujumbura by road
Interest
90% with a non-dilutable 10% owned
by the Republic of Burundi
Mining Licence
Granted March 2015; valid for 25 years
and renewable thereafter
Infrastructure
Good road links to Dar es Salaam,
Tanzania and Mombasa, Kenya
Product
Rare Earth mineral concentrate
Exploration Target (JORC)
20,000 – 80,000 tonnes of vein
material with upside potential
Simple Operation
Veins (408 in situ identified to date) to
be extracted by manual mining from
host rock (free-digging - no explosives
required)
First Production and Sales
Expected Q4 2017
GAKARA DEVELOPMENT
SCHEDULE
Steady stream of positive news expected
as near-term milestones are met
IPO and construction
financing complete
Start of mining
activities
Exploration
activities
recommence
Process plant
completion
First sales of
concentrate
2017
4
2018
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 Gakara Basket
The Gakara basket is weighted heavily towards the magnet rare earths,
including neodymium and praseodymium, which are driving demand
and account for approximately 70% of annual global REE sales due to
their use in vital components in motors, generators, wind turbines, and
electric vehicles.
Based on average samples from Gakara, magnet REEs account for
approximately 20% of the contained REOs within the Gakara ore, but
represent an average of over 80% of the contained value of REOs at
current market prices.
By Contained Value
By REO Content
3%
5%
9%
22%
2%
15%
4%
31%
61%
48%
Lanthanum
Cerium
Praseodymium
Neodymium
Others
Based on average of REOs within Gakara in situ vein samples and market prices of purified
REOs on China FOB basis as at 2 October 2017
Opening of new mine
areas within project
Production rates
intended to increase
to 5,000tpa target
Capture greater share of
contained REE value through
intermediate concentrate
e.g. mixed carbonate
Opportunities to further
increase production and
investigate downstream
value opportunities
Potential to partner
in the build of small
scale separation plant
FUTURE
5
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 RARE EARTHS –
TECHNOLOGY METALS
Rare earth elements are a
group of seventeen chemically
similar elements that are
crucial for the production and
manufacturing of various
hi-tech products.
Global demand for REEs has grown
significantly in recent years, driven
by the increased use of rare earth
permanent magnets (the most
powerful in the world), particularly
neodymium and praseodymium, in
key markets including electric vehicles
(‘EVs’), mobile phones and renewable/
green technologies.
Global Rare Earth
Demand by Element
2012-2016
Eu+Gd+Tb
Samarium
Cerium
Yttrium
Praseodymium
Lanthanum
Dysprosium
Neodymium
200,000
150,000
100,000
50,000
0
Source: Argus Media
2012
2013
2014
2015
2016
Electric vehicles
Smart phones
Forecast demand growth for NdPr
is primarily driven by the anticipated
uptake of EVs as well as growth in all
electric motor usage
Neodymium gives your phone the
power to vibrate
Wind turbines
NdFeB magnets have allowed
wind turbines to reduce costs and
increase efficiencies
Neodymium-containing magnets are used in virtually all
electric motors. The demand for REEs is likely to increase
on the back of the widely-reported revolution in electric
vehicles, which has been pushed by commitments from
Norway, France, Germany, the UK and various other countries
(including strong indications from China) to prohibit sales and
production of internal combustion engine cars in the future.
It took 20 years to sell 1 million electric vehicles and yet it
only took 18 months to sell the next 1 million electric vehicles.
Several car manufacturers are increasing their output of
electric vehicles, and Volvo, amongst others, has announced
that all new car models from 2019 onwards would be solely
or partially battery-powered. The use of electric vehicles will
increase rapidly in the coming years, with UBS forecasting
a twenty-fold increase in global electric vehicle sales to 15
million units by 2025.
The same rapid growth is expected to apply to the renewable
energy sector, where large wind turbines require up to two
tonnes of rare earth magnets, which are enormously strong
and make highly efficient generators.
REEs are also commonly used in phosphors - important for
televisions, smart phones and computer screens or any other
visual devices that require cathode ray, liquid crystal display
or plasma display panel technologies. REE phosphors are
widely used in energy-efficient LEDs, which have the same
light output as standard incandescent light bulbs, but use just
a fraction of the power.
Rare earth
concentrate
6
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 The price of NdPr
oxide in China is up
50% year-to-date and
70% year-over-year
Source: Adamas Intelligence,
August 2017
$140
$120
$100
$80
$60
$40
$20
$-
80%
60%
40%
20%
0%
-20%
-40%
-60%
2012
2013
2014
2015
2016
2017
2012 2013 2014 2015 2016 2017
Application
Rare Earths
Demand drivers
Magnets
Nd, Pr, Sm, Tb, Dy
Automotive, wind turbines, drives for computers, mobile
phones, mp3 players, cameras, voice coil motors, hybrid
and electric vehicles, cordless power tools, sensors,
medical imaging (MRIs)
LaNiH batteries
La, Ce, Pr, Nd
Hybrid vehicle batteries, hydrogen absortion alloys for re-
chargeable batteries
Phosphors
Eu, Y, Tb, La, Dy, Ce, Pr, Gd
LCDs, PDPs, LEDs, energy efficient fluorescent lights/
lamps
Fluid cracking
catalysts
La, Ce, Pr, Nd
Petroleum production - greater consumption by ‘heavy’
oils and tar sands
Polishing
powders
Ce, La, Nd
Mechano-chemical polishing powders for TVs, monitors,
tablets, mirrors and (in nano-particulate form) silicon chips
Auto catalysts
Ce, La, Nd
Tighter NOx and SO2 standards - platinum is re-cycled, but
for rare earths it is not economic
Glass additive
Ce, La, Nd, Er
Ce cuts down transmission of UV light, La increases glass
refractive index for digital camera lens
Fibre optics
Er, Y, Tb, Eu
Signal amplification
Note: Scandium (Sc), Yttrium (Y), Lanthanum (La), Cerium (Ce), Praseodymium (Pr), Neodymium (Nd), Promethium (Pm), Samarium (Sm), Lutetium (Lu),
Europium (Eu), Gadolinium (Gd), Terbium (Tb), Dysprosium (Du), Holmium (Ho), Erbium (Er), Thulium (Tm), Ytterbium (Yb).
7
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 HEALTH AND SAFETY
Rainbow is committed to ensuring that all its
staff, as well as contractors and other visitors to
its sites, are kept healthy and safe from harm.
The Company adopts a zero harm policy.
Throughout the organisation, individuals are held responsible for their own
and everyone else’s safety and wellbeing, while managers and supervisors
are responsible for ensuring standards and policies are maintained at all
times. The Health and Safety Committee, a sub-committee of the Board
of Directors (chaired by Shawn McCormick), is ultimately responsible for
making sure appropriate policies are in place, and that those policies are
being enacted.
Reporting
Safety statistics are collected on a monthly
basis and reported to senior management.
These statistics include any Lost Time Injuries
(‘LTIs’), but also incidents requiring first aid, near
misses, damage to property, or environmental
damage.
There were no such incidents reported in the
year to 30 June 2017, during which period a
total of 46,000 man hours were worked by
Rainbow staff, and 27,000 by contractors.
Policies
Prior to work commencing on the Gakara site
in April 2017, an Operating Health and Safety
(‘OHS’) policy was put in place. This policy
covered a number of areas, including training,
rules and regulations, protocols for various
types of working activity (e.g. drilling, working at
heights), as well as guidelines on how to remain
healthy and free from illnesses endemic to the
area such as malaria and HIV/AIDS.
Fully inducted, trained
and equipped staff
Training
The bulk of the work at either the Gakara mine
site or the Kabezi plant site was undertaken
by local recruits, with little prior experience. All
staff and contractors are required to undergo
an induction programme before commencing
activity. This induction serves to set out the
rules with which all employees and visitors must
comply on site, but also covers training in use
of tools and equipment, as well as ensuring all
staff are provided with the requisite personal
protective equipment (‘PPE’).
As well as induction, workers are required to
hold routine toolbox meetings to discuss safety
issues, and are encouraged to consider risks
of each activity for themselves. The principle
of each individual taking responsibility for his/
her own safety, as well as that of colleagues, is
entrenched in the training process.
Health
A number of illnesses were identified as risks
under the OHS policy, notably malaria, HIV/AIDs,
and gastric infections. The OHS policy provides
guidance on how to reduce the risks from
these and other illnesses. Hygiene standards
are enforced in particular around areas where
food is prepared, and staff are encouraged to
minimise exposure to malaria through the use of
mosquito nets and repellents.
Potable water was also identified as a priority,
in view of the absence of reliable sources at the
mine site.
In the event of illnesses and accidents,
employees are offered medical and accident
insurance which substantially covers the cost of
medical care.
In addition, supervisors were provided with
first aid training from a reputable international
organisation.
Other health and safety
All staff are made aware of the potential risks
not only to themselves and colleagues, but also
to local communities. Rainbow’s operational
sites are cordoned off and it is not permitted for
any persons without the appropriate training or
induction, and PPE, to enter.
On public roads, Rainbow staff and contractors
are required to drive with care and attention,
particularly on quieter rural roads frequently
used by local communities. Safety signage is
employed extensively to warn all of the relevant
risks and to provide reminders as to each and
everyone’s obligations.
8
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 CORPORATE AND SOCIAL
RESPONSIBILITY
Rainbow is committed to the highest standards of Corporate Social Responsibility
(‘CSR’) and strives to ensure that the local community shares in the benefits of its
Gakara Rare Earth Project in Burundi.
The local community is our partner in this endeavour, and our progress to date would not have
been possible without their continued support. As a result, our present CSR and community outreach
initiatives are reflective of the value we place on this partnership. To date, this has included a variety
of activities:
X Since inception Rainbow has made specific
financial donations of over US$640k to local
communities and national social programmes;
X As at 30 June 2017 Rainbow directly employed
114 Burundian staff and had 88 subcontractors
working on site;
X Rainbow has also sought to provide local
people with business opportunities such as
catering for the workforce and purchasing
local produce wherever possible;
X Rainbow is undertaking improvements to
main access roads which benefits all of the
local communities in which we operate;
X Rainbow awarded contracts to Burundian
companies of over US$400k in the year
ended 30 June 2017 for both infrastructure
and professional services, prior to the
commencement of local supply contracts for
major production consumables such as fuel;
X All Rainbow mining and production employees
can be registered for mobile banking using
‘Pesa Flash’, should they so wish, allowing for
cashless transfers of salaries and banking facilities
to individuals in many cases for the first time;
X The state of Burundi has a non-dilutable 10%
shareholding in the project and will benefit
from any dividends generated, together with
normal payroll taxes, corporation taxes and a
royalty of 4% on all sales revenue;
X Rainbow has made donations to several
projects in the town closest to its mining area,
including the construction of a municipal
building consisting of multi-purpose rooms,
offices and the supply of certain equipment;
Female workers’
co-operative at Kabezi
prior to site clearance
X Rainbow has sought to improve local sporting
activities and recently organised a football
tournament for the municipalities which cover
the project area, and the supplied sporting
equipment for the teams;
X Rainbow is in the process of constructing its
processing plant at Kabezi, adjacent to the
shore of Lake Tanganyika and has rerouted an
existing lane from across the site to ensure
unhindered access to the lake shore and
fishing vessels, thus helping the community
gain easy access to the lake;
X Rainbow is committed to ensuring the best
practice in regard to the environmental impact
of its operations. The Company submitted an
approved Environmental and Social Impact
Assessment (‘EISA’) as part of the mining
licence application in 2015, which was fully
updated during 2017 to incorporate the
processing plant area at Kabezi. It is fully
permitted for mining and there will be no
blasting or use of hazardous chemicals.
Population records have been approved
along with a compensation formula for any
landowners that must be moved or have had
agricultural land appropriated. The majority
of these have been settled by 3 October 2017,
with only a small amount remaining in respect
of those impacted by the mine site access road;
X Rainbow is committed to adhering to the
strictest international health and safety
practices. In line with this, we employ a fully
qualified OHS Manager and have incorporated
stringent health and safety measures into
day to day practice as well as establishing a
formal committee comprised of members of
the Board;
X All employees are equipped with full PPE and
rigorous safety assessments are undertaken
prior to any activity;
X The Burundi mining industry is in its infancy,
and thus far, there has been strong support
shown for the Gakara Project at both a local
authority and national governmental level.
As the mining sector is in the early stages of
growth, Rainbow can play a defining role in
the development of the industry in Burundi
and accordingly, is committed to continuing
close liaison with workers and the local
community to ensure the project is run for
the benefit of all stakeholders, thus leaving
the community and country in a net positive
position.
9
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 CORPORATE AND SOCIAL
RESPONSIBILITY
Government Payments
Rainbow is committed to full payment of its tax and fiscal
obligations wherever it operates, as this supports the social
licence to operate, and ensures a fair contribution to local
economies.
For the year ended 30 June 2016, and until commencement
of operations at Gakara in earnest in April 2017, activity on
the ground in Burundi was limited to that required to keep
the permits in good order, which meant that taxation and
other government payments were modest during this period.
The table below sets out the key payments to government,
as direct taxes (such as land taxes, duties etc) as well as
indirect taxes arising as a result of Rainbow’s activity (such
as payroll taxes, withholding tax, and net VAT paid in the
period).
US$’000
Royalties
Permit and land taxes
Corporation tax
Duties & other
Total tax borne
Payroll tax
Withholding tax
Net VAT
Total net payments to
government
2017 (unaudited)
2016 (unaudited)
UK
Burundi
Total
UK
Burundi
Total
-
-
-
-
-
199
-
-
199
-
15
-
10
25
15
1
7
48
-
15
-
10
25
214
1
7
247
-
-
-
-
-
59
-
-
59
-
85
-
-
85
5
-
-
-
85
-
-
85
64
-
-
90
149
10
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 STRATEGIC
REPORT
11
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 CHAIRMAN’S STATEMENT
“
When Rainbow first obtained its exploration
permit for the Gakara rare earth deposit in 2011,
we believed that the Company had something
special and the potential to become one of the
most important rare earth mines in the world. We
had the desire to become Africa’s first operational
rare earth mine.
Since then, we have come a long way, and the
journey has been a rewarding one thus far, but
not without its particular trials and tribulations.
The challenges that we have endured have
included a dramatic downturn in the price of
rare earths and civil unrest within Burundi in
2015, all in the context of one of the longest
bear markets to have faced the mining sector in
living memory.
In spite of all this, we have remained unshaken
in our confidence in the Gakara project for two
principal reasons: first of all, we believe that
the demand for rare earths is likely to increase
over the coming years, in direct response to
growth in usage of electric vehicle technology
as well as in many new green technologies;
and secondly, we believe in the deposit itself
- the grades at Gakara, which have been
independently estimated to be between 47-67%,
are among the highest anywhere in the world,
which in turn allows for cleaner, lower-cost
mining techniques.
In the 12 months to 30 June 2017, the Company
has been able to take a number of major steps
in order to realise the potential of the mine.
The successful IPO, which completed in
January 2017, raised a total of US$8 million, and
transformed Rainbow into a public company
with a Standard Segment listing on the main
board of the London Stock Exchange. These
funds are now being used to complete the
construction of the mine and plant at Gakara,
with the first shipment of concentrate still on
track for Q4 2017 through our multinational
distribution and offtake partner, thyssenkrupp
Raw Materials.
We have also been able to put in place a team
with the skills and experience, as well as the
energy and drive, not only to complete the
construction phase, but also to manage the
project as it moves from construction into
production. I would like to thank our CEO, Martin
Eales, who has been instrumental in guiding the
project through some of the toughest periods,
for his endurance and leadership.
I would also like to thank my fellow Board
members, all of whom are also shareholders,
for their support in completing the fundraising,
as well as for their guidance and advice in the
ongoing running of the Company.
Without the support of our staff and communities
in which we operate in Burundi, this project
would go nowhere. I would like to thank them
all for their enthusiasm and positive support
of Rainbow. Ultimately we are guests in their
country and we hope that we have a long and
sustainable partnership with all the people of
Burundi and that all of our work and effort yields
a net positive result for all stakeholders.
At the time of writing, the construction phase
nears completion, but the challenges are far
from over, and we need to remain focussed on
delivering the project on time and on budget.
The fundamentals of both the Gakara project,
and the rare earths market, if anything are even
more exciting than when we first started this
journey.
We look forwarding to delivering to you regular
updates on our project as we achieve the
various milestones we have set.
Adonis Pouroulis
Chairman
12
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 CHIEF EXECUTIVE OFFICER’S REVIEW
“
This is the first CEO Statement I have had the
opportunity to write for Rainbow as we mark the
end of our first financial year as a public company
and I am pleased to be able to report on a
transformational 12 months.
Corporate
The most significant event at the corporate level
was of course the IPO and Admission of the
Company’s shares to trading on the Standard
segment of the London Stock Exchange at the
end of January 2017. The Company raised gross
proceeds of US$8 million by placing new shares
with a variety of investors and I have enjoyed
getting to know many of our shareholders better
over the course of the year and keeping them
up to date with the Company’s progress.
Rainbow maintains a small corporate office
in the UK, where I am based with Rainbow’s
CFO, Jim Wynn, thereby keeping overheads
to a minimum, whilst the vast majority of the
Company’s administration and operating staff
are based in Burundi.
Operations – Mining
During the 2016-17 financial year we were
only able to commence work in earnest after
completion of the IPO, which provided the
funding for the development of the Gakara
Project. The Company has selected the
Gasagwe area to be its first area of mining
operations, which is expected to provide ore
from mining activities for at least the first two
years of production, with other areas (such as
Gashirwe) expected to come online thereafter.
A variety of preparatory tasks were required
before mining activities could begin at Gasagwe:
these included access road construction,
updated environmental studies and approvals,
negotiation with land holders and settlement
of compensation, recruitment and training of
workers, and import of machinery. By the end
of June 2017 the mining team at Gasagwe had
made excellent progress in stripping waste
material in order to expose the rare earth
bearing veins which will constitute the run of
mine ore.
Just after the financial year end, in July 2017,
Rainbow hosted an Inauguration Ceremony at
Gasagwe where a formal ribbon-cutting was
undertaken by the President of the Republic
of Burundi, His Excellency Pierre Nkurunziza.
The ceremony was well attended and we are
delighted with the support we have received
to date from the Burundi government and local
community.
Operations – Processing
Rainbow’s production plan involves all run
of mine ore being processed into rare earth
mineral concentrate by its processing plant
located in the Kabezi region, some 20km from
the mining areas and about 13km south of
Burundi’s capital city, Bujumbura. This site is
advantageous to Rainbow, being relatively flat
because of its location near Lake Tanganyika,
and due to its proximity to a main asphalt road,
which will provide good transportation links for
export of concentrate.
Work has progressed very encouragingly on
the Kabezi plant site over the past few months
(although not without challenges), with all of
the bulk earthworks completed before the end
of the financial year followed by civil cement
works, and construction of an office block,
warehouse, and the processing plant itself all
in progress since year end, managed by our
EPCM contractors Obsideo from South Africa
but utilising local labour at all times. At the time
of writing, the completion of construction and
commissioning of the plant is expected in the
coming weeks, which should allow us to meet
our target of shipping first concentrate in Q4
2017.
We have deliberately built in a relatively
large amount of volume capacity within the
processing plant design, which should enable
Rainbow to comfortably increase annual
production of concentrate in years to come,
should the demand be there, without any
significant capital expenditure when new mining
areas come on stream.
13
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 CHIEF EXECUTIVE OFFICER’S REVIEW
Secondly, virtually every week we now receive news reports
concerning the potential rapid increase in production of
and demand for electric vehicles, whether mandated by
national governments as part of environmental policies or
by car manufacturers themselves, with some such as Volvo
announcing that all new models after 2019 will be electric
or hybrid vehicles. Whilst car manufacture is already a large
consumer of rare earth materials, the basic fact is that each
electric vehicle will use even more – principally due to the
permanent magnets incorporated in the motor. When added
to the considerable demand for rare earth magnets also
created by the wind turbine industry, it is clear to see that the
increasing movement towards green energy will stimulate
further demand for rare earth materials.
Rainbow team
We have a small team of truly committed individuals,
who have pulled together over the last 12 months to give
Rainbow the best possible start to life as a public company.
I would like to pay particular thanks to Rainbow’s Executive
Committee: Gilbert Midende (General Manager), Braam
Jankowitz (Project Manager), Cesare Morelli (Technical
Director) and Jim Wynn (Chief Financial Officer) who provide
such support and wise counsel to me, however I am grateful
to all our employees for the hard work and dedication they
show every day and I feel proud to work with you all.
Outlook for 2017-18
The current financial year is likely to be even more
momentous for Rainbow than the last and should see
the first sales of our rare earth concentrate through
thyssenkrupp Raw Materials in Q4 2017, with production
and sales then ramping up on a steady basis through 2018.
We have seen increases in prices of the various rare earth
elements in the oxide and metal forms over the course
of 2017, with our ‘basket price’ for Gasagwe concentrate
increasing by around 70% in 2017 so far, which bodes very
well for the future returns from the Gakara Project as we
seek to develop one of the very few non-Chinese sources of
rare earths. An exciting year lies ahead.
Martin Eales
Chief Executive Officer
Corporate Social Responsibility
Rainbow values the strong relationships it has formed in
Burundi and we understand that our social licence to operate
is only as strong as those relationships. We take great care to
include local communities in all our activities, whether it be
holding public consultations well in advance of undertaking
work on the ground, ensuring that our workforce is sourced
locally, or, wherever possible, using Burundian contracting
companies for elements of construction and transportation.
In the 2016-17 financial year, Rainbow recruited and trained
108 new employees from the areas around the Gasagwe
mine and the Kabezi processing plant with 27 following
soon after the year end and also provided work for up to 88
sub-contractor employees at the end of June. Rainbow
has also established a catering co-operative alongside its
operations which allows local people to prepare food for all of
the employees.
Wherever land is appropriated for Rainbow’s activities we are
diligent in ensuring that the correct compensation is paid
to all families that have an interest in land or crops affected,
based on a formula set out in Burundian law.
Rainbow is proud to maintain an objective for a zero-harm
operation. For the period to 30 June 2017 the Company
did not incur a single Lost Time Injury (‘LTI’), nor indeed
any incident requiring medical assistance. Our staff are
encouraged to report all incidents and ‘near misses’ in order
to improve the safety environment for anyone that may be
affected by Rainbow’s operations.
We were delighted to be able to support the 50th anniversary
celebrations of the parish church in Mutambu, the town
nearest to Gasagwe, in May 2017, and as part of the
Inauguration Ceremony in July 2017 Rainbow organised a
football tournament between the local districts.
CSR objectives for the coming year include promotion and
sponsorship of academic prizes for all schools within the
local area and a tree planting campaign.
The Rare Earths market
The world demand for rare earths is growing each year with
production currently dominated by China. With a producing
mine located outside of China, Rainbow will be important
to Western buyers of rare earth materials concerned about
security and provenance of supply and seeking a non-
Chinese source. During the IPO process, our investors were
keen to understand the dynamics of the rare earths market
that we felt were crucial and there are two in particular that
respectively have an impact on either supply or demand.
Firstly it has become very clear that the Chinese government
has made strenuous efforts to clamp down on so called
illegal production of rare earths in China, both to enforce
environmental standards and to consolidate production
within the hands of six state-approved groups. This,
combined with falling inventory levels, has contributed to
much tighter supply in recent months and consequently
increasing prices.
14
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 OPERATIONS REVIEW
Preparation work for the IPO
Between July 2016 and January 2017, activity at
the Gakara project was restricted to maintaining
the Company’s good standing in Burundi and
providing information and support for the
independent Competent Person’s Report (‘CPR’)
which was completed by MSA Group (‘MSA’)
in October 2016. This document was first and
foremost a requirement of the IPO and listing
process, but also provides the Company and its
investors with a detailed independent report of
the project and its context.
Despite considerable historic mining activities,
the Gakara Project was considered by MSA to be
an Exploration Target1, as defined in the JORC
Code, rather than a Mineral Resource, which
was estimated as consisting of between 20,000
and 80,000 tonnes of mineralised material
grading 47-67% TREO. MSA also recommended
that a period of Trial Mining be conducted at
key locations (notably Gasagwe and Gashirwe
West) in order to confirm procedures and
methodologies to be applied in full-scale
commercial mining of a project.
The CPR was published together with the IPO
prospectus on 25 January 2017. By February
2017, US$8 million in gross proceeds had been
raised, and work began to bring the Gakara
Project into production, with a target date of
shipping first concentrate in Q4 2017.
Consistent with the recommendations in the
CPR, the Directors decided that the amount of
additional exploration work required to declare
a Mineral Resource or a maiden Ore Reserve
would be uneconomic at the stage of the
Company’s development.
In addition, the Directors believed that
exploration information regarding the
deposit at Gakara, together with historic
project and production data, underlined the
continuity of the mineralisation as well as the
appropriateness of the mining and processing
techniques, and that the commencement of
operations was therefore commercially viable
from the outset.
1
An Exploration Target is defined
as a statement of the exploration
potential of a mineral deposit in
a defined geological setting for
which there has been insufficient
exploration to estimate a Mineral
Resource. MSA Group concluded
“that the characteristics of the
REE veins [within the Gakara
Project] with respect to their
width, spatial continuity and
compositional variability cannot
be easily quantified to the level
of confidence required for the
reporting of a Mineral Resource”.
Rainbow Directors in the
London Stock Exchange
on the day of listing
(30 January 2017).
From left to right:
Adonis Pouroulis, Shawn
McCormick, Martin Eales,
Alexander Lowrie
15
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 OPERATIONS REVIEW
Construction work at Gakara
Following the IPO, work began on the Gakara
Project. Operations were divided into two main
areas – mining activities, which initially focused
at the Gasagwe deposit within the mining
permit; and work on the processing plant site at
Kabezi.
Gasagwe mine site
In Q2 2017, earth-moving equipment was
selected and ordered (consisting of two
Tractor Loader Backhoes ‘TLBs’, one tractor
and a trailer), while work commenced on site
preparation using locally-hired workers and
contractors.
Initial activity included basic site preparation,
such as obtaining suitable accommodation
and facilities, developing access routes,
and recruiting a local workforce. In addition,
preliminary exposure of the vein at Gasagwe
continued using manual techniques, in order
to remove overburden and identify the scale of
the deposit ahead of full scale waste removal
activities.
Mine preparation activities at the site
commenced in April 2017, and by the end of
June 2017 a total workforce of 114 staff and 2
expatriate managers had been recruited.
Although the TLBs had cleared customs only
just prior to the end of the period, considerable
progress had been made on site, with some
4,595 tonnes of pre-stripping completed using
hand tools and wheelbarrows. The upper levels
of the Gasagwe vein had been exposed, which
indicated a strike length of the ‘main vein’ in
excess of 80 metres, with a number of smaller
side veins adding to the overall size of the
deposit.
The fact that the ‘main vein’ appears to be
significantly larger than initial estimates has
been extremely encouraging, as has the
testwork of its composition (which in August
2017 indicated that the upper portions had
an average grade of 62% TREO, compared to
MSA guidance of between 47-67%). However,
progress of operations has been hampered
by a number of practical challenges including
the availability of fuel, reliability of contractor
equipment, delays to importation of equipment,
and the slow progress of receiving final formal
approval for full scale mining operations.
In spite of this, the stripping of waste material
has progressed well. The extraction of ore
from this vein commenced in earnest once the
ROM stockpile bunkers were completed at the
Kabezi plant site in September 2017. This will
allow management to meet its target of first
production of mineral concentrate in Q4 2017.
Kabezi plant site
After considering various alternatives, a site
for the plant location was chosen near Kabezi,
approximately 13km south of Bujumbura next
to the RN3 road. Although approximately 20km
from the mine site areas, given the relatively low
volumes of ROM ore to be transported to the
Gasagwe mine site
July 2017 (view to south)
16
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 plant from the mine (typically a single truck per
day), the advantages of good road connectivity,
sources of water, and flatter terrain outweighed
the extra haul distances.
The site was acquired in April 2017, and
clearance of vegetation began in May 2017.
Bulk earthworks were undertaken by a local
contractor and completed in June, and
concrete works were substantially completed in
September.
In March 2017, a fixed-price EPCM contract was
signed with Obsideo Consulting for the design,
procurement, construction and commissioning
of its processing plant. Under the terms of the
contract, Obsideo would be responsible for
delivering and commissioning a plant designed
to process the Gakara ROM ore into a mineral
concentrate, for a price of approximately US$1.8
million.
At the end of June 2017, work had progressed
in line with expectations, with parts having
been selected from individual suppliers and
shipments due to be transported to the plant
site between July and October 2017.
The first containers that arrived encountered
minor delays while clearance documentation
was finalised, however as more goods have
arrived, the process has become smoother.
A local contractor was engaged to perform the
civils and concrete works at site, the bulk of
which was completed in August and September.
Practical challenges faced by the Company
included the availability of building materials as
well as trained workers, however this work is still
expected to be completed in order to meet the
target of producing first ore in Q4 2017.
As at 3 October 2017, the majority of civils work
has been completed and most of the plant
equipment has arrived on site. Construction
and commissioning is therefore expected to
be completed in time to meet the overall target
for exporting the first shipment of mineral
concentrate in Q4 2017.
Safety and Health
Since commencement of activities on the
ground in Gasagwe and Kabezi, all employees,
contractors and sub-contractors have been
mandatorily inducted in safety procedures.
By the end of June 2017, not only had no LTIs
been reported, but no ‘near misses’ or incidents
requiring medical treatment have occurred. A
total of 74,000 LTI-free man hours had been
worked during this period.
Details of the Company’s safety and health
practices and policies are set out on page 8.
Construction works at
Kabezi plant site.
September 2017
17
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 FINANCIAL REVIEW
Profit and loss
Cashflow
Net cash in the 12 months to 30 June 2017 increased by
US$3.0 million.
Cash outflows included operating expenses and net
movements in receivables and payables (net cashflow from
operating activities) totalling US$0.8 million, US$2.1 million
on exploration and mining capex, and the repayment of the
Pala loan for US$1.7 million.
Cash inflow related to the equity placement which raised
US$7.4 million net of costs and a US$0.3 million loan drawn
in the period and subsequently settled in equity at IPO.
Financing
The IPO listing resulted in the settlement of the Pala loan,
which had been the Company’s principal outstanding loan
during the year.
Taxation
The corporation tax rate in Burundi is 30%, however no
revenues were earned during the period, and therefore no
taxable profits reported.
During the year ended 30 June 2017, activity within the
Company focused on fundraising and documentation prior
to the IPO in January 2017, followed by exploration, mine
preparation and construction activity. There were no sales
during the year, therefore no revenue has been reported, and
expenditure has been split between those costs that have
been expensed to the income statement (including corporate
and support activities), and those that have been capitalised
as part of the construction costs of the Gakara mine.
Administration expenses of US$1.3 million (2016: US$0.6
million) included corporate salaries of US$0.3 million, US$0.2
million relating to IPO costs, US$0.5 million representing the
accounting charges for share options issued in the year and
US$0.3 million of other administrative and corporate costs.
The increase compared to the prior year reflects the increase
in activity levels, particularly connected with and subsequent
to the IPO.
Exploration support costs, which are not capitalised, totalled
US$0.1 million in the year (including travelling and salaries),
slightly higher than the previous year.
Finance costs of US$0.2 million relate mainly to the effective
interest charges on the Pala Loan which was repaid in the
year. Finance income refers to the gain on extinguishment of
the Pala Loan of US$0.2 million.
No taxation charges were recognised in either the year ended
30 June 2017 or 2016. The Group generated a loss after tax
of US$1.4m, an increase of some 17% compared with the
year ending 30 June 2016. This increase reflects the costs
expensed associated with IPO and the significant change
in support activity levels following the raising of funding in
January 2017.
Balance sheet
The Company’s Non-current assets of US$6.0 million relate
to the capitalised exploration and mine development costs of
the Gakara Project in Burundi. During the year, this increased
by approximately US$2.2 million, essentially as a result of
capex in the year. The Gakara Project was reclassified from
exploration and evaluation assets to mine development
costs within property, plant and equipment in the year as
the project was considered to have reached commercial and
technical feasibility for development.
The Company had total liabilities of US$0.4 million (2016:
US$2.4 million), of which US$0.3 million related to amounts
owed to staff, shareholders and in respect of payroll taxes
due at year end.
During the year, the Company repaid in full the Pala Loan
settling the liability in cash for US$1.7 million.
18
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 DIRECTORS’
REPORT
19
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 DIRECTORS’ REPORT
The Directors present their annual report and the
financial statements of the Group for the year
ended 30 June 2017.
General
Rainbow Rare Earths Limited, the parent
company of the Group, was established in
Guernsey on 5 August 2011. On 30 January
2017, its shares were listed on the Standard
segment of the Main Market of the London
Stock Exchange.
Principal Activity
mining permit), and to consider further mining
assets for acquisition as appropriate.
Business Review
A review of the business during the year is
included in the Chairman’s statement, the CEO’s
statement, and in the Operating and Financial
Reviews. The Group’s business and operations
and the results thereof are reflected in the
attached financial statements.
Business Risks
A review of the key risks to the Company is set
out on page 25.
The Company’s principal activity is the
exploration and mining of rare earth minerals at
its Gakara Project in Burundi.
Advisers
Business Model
The basis on which the Company seeks to
preserve and generate value is through the
investment of its funds in the development
of exploration assets and mines, which in
turn allow for the production of rare earth
concentrates which are then sold at a profit. The
net cash generated from these activities is used
to service the Company’s financing, re-invested
in further exploration activity or in capex, or
(where appropriate) repaid to investors in the
form of dividends.
In the short term, this strategy is focused
around the development of the Gakara Project
in Burundi, which is expected to enter into
production during Q4 2017. Longer term, the
Company hopes to develop this mine further
(benefiting from the considerable geological
potential of the deposit held within the Gakara
Directors’ Remuneration
The Company’s advisers are set out on page 59.
Financial Results
During the 12 months ended 30 June 2017, the
Company reported a Net Loss of US$1,402k
(year to 30 June 2016: Net Loss of US$1,200k).
No dividends have been declared in respect of
the years ending 30 June 2017 or 2016.
Directors
A list of the Directors of the Company is set out
on page 23.
No Director shall be requested to vacate his
office at any time by reason of the fact that
he has attained any specific age. The Board
considers that there is a balance of skills
within the Board and that each of the Directors
contributes effectively.
Notes:
Non-executive directors received
no fees prior to the IPO in January
2017.
James Burgess resigned as a
Director on 16 November 2016.
He received no remuneration prior
to this.
Alexander Lowrie was appointed to
the Board on 16 November 2016.
Atul Bali was appointed to the
Board on 29 March 2017.
Share option awards in the year
are set out on in Note 18 to the
Financial Statements (page 53).
Non-Executive Chairman
Adonis Pouroulis
Non-Executive Directors
Alexander Lowrie
Robert Sinclair
Atul Bali
Shawn McCormick
Executive Director
Martin Eales
Total
Salary
(US$’000)
Benefits
(US$’000)
Pension
(US$’000)
Other
(US$’000)
Total
(US$’000)
June
2016
June
2017
June
2016
June
2017
June
2016
June
2017
June
2016
June
2017
June
2016
June
2017
-
-
-
-
-
22
14
14
8
14
199
199
209
281
-
-
-
-
-
-
-
-
-
-
-
-
3
3
-
-
-
-
-
-
-
-
-
-
-
-
8
8
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
22
14
14
8
14
130
130
199
199
350
422
20
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017
Martin Eales’s employment conditions were amended at the time
of the Company’s IPO on 30 January 2017. His gross salary was
set at £175k per annum, and he became entitled to healthcare
and employer pension contributions of 8% of his gross salary.
In addition, he agreed to a settlement of £100k (US$122k),
in return for waiving a clause in his previous employment
contract that allowed for a potential profit share which had
been entered into at the time of his appointment in 2014.
The potential profit share was non-binding, and remained at
the discretion of the Remuneration Committee. This amount,
which will be subject to UK tax, had not been settled at the
year end, and remains outstanding at 4 October 2017, as
settlement is subject to Remuneration Committee approval
based on the status of the Group’s funding.
Directors’ Responsibility Statement
The Companies (Guernsey) Law, 2008 requires the Directors
to prepare financial statements for each financial period,
which give a true and fair view of the state of affairs of the
Group for that period and of the profit or loss of the Group for that
period. Under that law they have elected to prepare the financial
statements in accordance with International Financial Reporting
Standards as adopted by the EU and applicable law. In preparing
those financial statements the Directors are required to:
Principal shareholders
A list of shareholders who beneficially hold more than 5% of
the Company’s shares at 3 October 2017 is as follows:
Name of Shareholder
Pella Group (beneficially owned by
Adonis Pouroulis)
Malinova Holdings LLC (beneficially
owned by Shawn McCormick )
Number of
Ordinary
Shares
% of Share
Capital
45,351,944
29.33
8,705,470
5.63
The Pella Group includes Pella Ventures Limited, Agulhas Nominees Pty Limited,
and Artemis Nominees Limited.
Interests of Directors and senior managers
The interests (all of which are beneficial and include
related parties) of the Directors and Senior Managers in the
Company’s issued share capital are as follows:
Name of
Shareholder
Position
Number of
Ordinary
Shares
% of
Share
Capital
Adonis Pouroulis
Non-exec chairman
45,351,944
29.33
X Select suitable accounting policies and then apply them
Shawn McCormick Non-exec director
8,705,470
consistently;
X Make judgments and estimates that are reasonable and
prudent;
X State whether applicable accounting standards have
been followed, subject to any material departures
disclosed and explained in the financial statements; and
X Prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the
Group will continue in business.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any
time the financial position of the Group and to enable them
to ensure that the financial statements have been properly
prepared in accordance with the Companies (Guernsey) Law,
2008. They are also responsible for safeguarding the assets
of the Group and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors confirm that they have complied with the
above requirements in preparing the financial statements.
The Directors consider the annual report and accounts, taken
as a whole, to be fair, balanced and understandable and
provide the information necessary for shareholders to assess
the Group’s position and performance, business model and
strategy.
So far as each of the Directors are aware, there is no relevant
audit information of which the Group’s auditor is unaware;
having taken all the steps the Directors ought to have taken
to make themselves aware of any relevant audit information
and to establish that the Group’s auditor is aware of that
information.
Alexander Lowrie
Non-exec director
4,963,459
Robert Sinclair
Non-exec director
3,971,246
Atul Bali
Non-exec director
1,152,438
Martin Eales
Chief Exec Officer
2,003,299
Cesare Morelli
Senior manager
1,249,680
Gilbert Midende
Senior manager
1,127,342
Jim Wynn
Senior manager
35,910
5.63
3.21
2.57
0.75
1.30
0.81
0.73
0.02
Total
68,560,788
44.35
The Directors (with the exception of Atul Bali, who was appointed
later in the year) entered into a lock-in agreement on 30 January
2017, the date of the admission of the Company’s shares to the
London Stock Exchange Main Market, pursuant to which they
undertook not to dispose of any shares for a period of 365 days.
Adonis Pouroulis, as the largest shareholder, additionally entered
into an agreement with the Company such that, provided his
interest remains greater than 20 per cent, he will not undertake
any activity that might prejudice the normal and independent
operation of the Board and the Company.
21
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 DIRECTORS’ REPORT
Website Publication
The Directors are responsible for ensuring that the annual report
and the financial statements are made available on a website.
Financial statements are published on the Company’s website
in accordance with applicable legislation in Guernsey governing
the preparation and dissemination of financial statements, which
may vary from legislation in other jurisdictions. The maintenance
and integrity of the Company’s website is the responsibility of
the Directors. The Directors’ responsibility also extends to the
ongoing integrity of the financial statements contained therein.
Going Concern
The Directors have reviewed the Group’s cash flow forecasts
for at least 12 months following the reporting date, sensitivities
and mitigating actions. After taking into account available
cash and forecast cash flow from operations, together with
financing facilities expected to be secured subsequent to
the year end (including an overdraft facility with Finbank
SA in Burundi) and the letter of support received from Pella
Resources, the Company’s largest shareholder, the Directors
consider that the Group has adequate resources to continue
its operational existence for the foreseeable future. For this
reason, they continue to adopt the going concern basis in
preparing the financial statements.
The basis for this assessment is set out in full in Note 2 to the
Financial Statements, on page 39.
Auditor
BDO LLP has expressed its willingness to continue in office
as auditors and a resolution to re-appoint BDO LLP will be
proposed at the forthcoming annual general meeting.
Signed on behalf of the Board of Directors on
3 October 2017
Martin Eales
Adonis Pouroulis
Chief Executive Officer
Chairman
22
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 BOARD OF DIRECTORS
Adonis Pouroulis
Non-Executive Chairman
Shawn McCormick
Non-Executive Director
Adonis is an entrepreneur whose expertise lies
in the discovery, exploration and development
of natural resources across Africa. Having
worked in the sector for over 25 years he has
extensive experience and a wide network of
industry relationships across the continent.
Adonis is founder and chairman of Petra
Diamonds (LSE:PDL), founder and director of
Chariot Oil & Gas (AIM:CHAR) and founder and
chairman of the Pella Resources Group. Adonis
holds a Bachelor of Science Degree (Honours).
Alexander Lowrie
Non-Executive Director
Alex is the co-founder of Telemark Capital LLP,
a partnership focusing on capital advisory and
asset management. Through its consulting
subsidiary, Gunnerside Advisors, Alex is also
involved in providing governance services as an
independent investment committee member
to a variety of advisory panels. Prior to this Alex
worked for 13 years in investment banking. He
was a director at Deutsche Bank and then RBS
from 2004 to 2012, having started his banking
career in 1998 at ABN AMRO. Through these
positions he has gained extensive market
experience in primary and secondary equity
offerings including bringing companies to
market through IPOs (including structuring,
marketing and distribution). Alex graduated
from Durham University with a BA (hons) in
Combined Social Sciences, and he is also in the
process of completing an executive MBA from
Henley Business School.
Shawn is an International Affairs specialist with
more than 20 years’ political and extractive
industries sector experience having served in
The White House as Director for African Affairs
on the National Security Council (Washington),
Political Affairs Director of BP (London) and Vice
President of TNK-BP (Moscow). He is currently
Managing Director of Connaught Strategies Ltd
and an adviser to the Pella Resources Group.
Robert Sinclair
Non-Executive Director
Robert is Managing Director of the Guernsey
based Artemis Trustees Limited, and a director
of a number of investment fund management
companies and investment funds associated
with Artemis Trustees Limited. He has over 48
years’ experience in finance and accountancy
of which 38 years have been spent in the
Guernsey financial services industry. Robert is
a director of several London Stock Exchange
listed companies. In the natural resources
sector, he is a director and chairman of the
Audit Committee of both Chariot Oil & Gas
Limited and EF Realisation Company Limited.
In the property sector, he is a director and
chairman of the Audit Committee of Picton
Property Income Limited. Robert is also
Chairman of Schroder Oriental Income Fund
Limited. He a fellow of the Institute of Chartered
Accountants in England & Wales and a Member
of the Institute of Chartered Accountants of
Scotland and the Society of Trust and Estate
Practitioners. Robert is a resident of Guernsey.
Atul Bali
Non-Executive Director
Martin Eales
Chief Executive Officer
Atul is a corporate CEO with extensive
experience in tech, government contracting and
regulated industries operating on six continents.
Over more than 20 years he has led more than
50 M&A and JV transactions in more than 25
countries and both managed and served on the
boards of several highly regulated businesses.
Currently he serves as a Non-executive
Director of Gaming Realms Plc, a mobile games
publisher, and as Chairman of Meridian Gaming,
regulated and operating in more than 30
countries, with a large footprint in Africa, Central
and South America and Central and Eastern
Europe. He has previously held divisional CEO or
President positions with IGT (NYSE), Aristocrat
(ASX), and Real Networks (NASDAQ), as well as
a venture capital firm. He previously trained as a
Chartered Accountant with KPMG in the UK.
After qualifying as a Chartered Accountant in
1997 Martin embarked on a 15 year career in
corporate finance, corporate broking and equity
capital markets in the City, rising to the position
of Managing Director at RBC Capital Markets
in London. With long experience of natural
resources companies and transactions Martin
joined the Pella Resources Group as Business
Development Director in early 2014 and was
then appointed Managing Director (later CEO) of
Rainbow later that year.
23
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 SENIOR MANAGEMENT
Gilbert Midende
General Manager, Burundi
Cesare Morelli
Technical Director
Gilbert has a doctorate in Geological Science,
which he obtained in 1984 at the Université
Libre de Bruxelles, Belgium. He was appointed
Director General of Geology and Mines for
Burundi in 1987 and was Minister of Mines
between 1988 and 1993. He has been a
consultant to the World Bank since 2007. From
1996 to 2001, he was Principal of the University
of Burundi and Minister of Higher Education and
is currently Professor in Economic Geology at
the University of Burundi. Gilbert is responsible
for all of the Group’s administration and
Government relations in Burundi.
Braam Jankowitz
Project Manager
Braam has worked in the mining industry since
1979. He has a masters degree in geology, which
he obtained in 1986 at the University of the
Orange Freestate, Bloemfontein, South Africa.
He has worked as a consultant in the minerals
exploration industry in many countries. He was
senior geologist on the Murray Basin Stage 2
Project in Western Australia in 2009 and 2010,
before moving to Shanta Gold in 2011 to take up
roles as Technical Services Manager, and later
general manager, on the New Luika Gold Mine.
He is a qualified professional natural scientist in
South Africa, and is a member of the Geological
Society of South Africa and the Geological
Society of Namibia.
Cesare Morelli has over 29 years’ experience in
minerals exploration in Africa including 18 years
in diamond exploration with De Beers managing
projects in south, west and central Africa.
Following his time with De Beers, he spent four
years with BHP Billiton as Minerals Exploration
Manager for Africa. At BHP Billiton he directed
exploration projects in a variety of commodities,
namely iron ore, aluminium bauxite, manganese,
copper and base metals, nickel and potash.
Cesare has been affiliated with Rainbow since
its inception and has been responsible for
project managing all of Rainbow’s exploration
work to date. He is a Director of Benzu Minerals
(Pty) Ltd, a consulting company based in South
Africa. Cesare is a member of the South African
Geological Society and the South African
Council for Natural Scientific Professions.
Jim Wynn
CFO
Jim is a Chartered Accountant and was
previously employed by Anglo American plc
where he held a number of roles within the
finance, business development, and strategy
departments of Anglo Industrial Minerals.
Jim’s most recent role was as Finance Director
of Avocet Mining PLC where he developed
extensive experience in francophone Africa as
well as the London public company market.
The above names have been designated as Persons Discharging Managerial Responsibility (‘PDMRs’)
24
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 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
Construction and
commissioning
risk
Production
issues
Civil unrest
The Gakara processing plant is expected to be
commissioned in Q4 2017. Construction of a
processing plant involves inherent risks of delays
and overruns.
These include the risk of materials and workforce
not being available, customs issues delaying
parts being imported, and teething problems
encountered during the ramp-up.
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 (e.g.
fuel), interruptions due to weather, among many
others.
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.
High
High
Medium
Rare earth prices The Company produces rare earth mineral
High
concentrate which is sold at a market price less a
discount (negotiated with each 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 expected to be
between 68-73%, however this may vary with new
customers or as terms are renegotiated.
The Company does not currently have a JORC-
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.
The Company currently forecasts limited financial
headroom before entering into profitable, cash-
generative production. If this period is prolonged,
e.g. due to delays in commissioning, the headroom
may not be sufficient and financing may be
required in order to continue in operation.
Low
Medium
Geological risk
Financing risk
Currency controls The Company will receive proceeds in US dollars,
Medium
which, under the Burundian Mining Code, must be
repatriated into Burundi.
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 (e.g. corporate costs, and any debt
payments in US dollars).
Management liaise closely with Obsideo, who are
responsible for constructing and commissioning
the plant (as well as its design). Any potential
issues are anticipated and addressed before they
impact timelines, wherever possible.
Management will monitor ongoing risks as far
as possible to mitigate potential issues arising
which might impact production. Exco convene
weekly to discuss current concerns, and monthly
reports are shared with the Board which highlight
the key issues facing operations.
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 prior-
itise 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.
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 agreement, thyssenkrupp
Raw Materials are responsible for negotiating
with end customers of the Company’s
concentrate, and are incentivised to obtain the
best price.
Rainbow’s models are based on conservative
assumptions of the quantity and size of rare
earth veins within the Gakara licence area. Once
in production, the Company will continue its ex-
ploration activities to improve its understanding
of the orebody, to minimise this risk.
Management is in advanced discussions with
its bankers and key shareholders to put in
place overrun facilities, which it expects to be
concluded shortly after the issuance of this
report, or as soon as required.
It believes these facilities will provide funding
even in the most conservative downside
scenario.
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.
25
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 CORPORATE GOVERNANCE
As a Guernsey-registered Company trading
on the Standard List of the Main Market of the
London Stock Exchange, the UK Corporate
Governance Code published by the Financial
Reporting Council does not apply to the
Company. However, whilst the Company does
not apply the UK Corporate Governance Code,
the Directors recognise the importance of good
corporate governance and have implemented
corporate governance practices having
consideration to the recommendations and
principles of the UK Corporate Governance Code
as far as is appropriate having regard to the size
and nature of the Company.
The Board oversees the performance of the
Group’s activities. It comprises experienced
Board members who have held senior positions
in a number of public and private companies.
The Board is responsible to shareholders for
the proper management of the Group. The
Non-Executive Directors have particular
responsibility to ensure that the strategies
proposed by the Executive Director are carefully
considered.
The Board meets regularly throughout the year,
and met seven times in the year to 30 June
2017. Prior to such meetings taking place, an
agenda and Board papers are circulated to the
Directors so that they are adequately prepared
for the meetings.
To enable the Board to discharge its duties,
all Directors have full and timely access to all
relevant information.
There is no agreed formal procedure for
the Board (or members thereof) to seek
independent professional advice but, pursuant
to their letters of appointment, the Non-
Executive Directors may, where appropriate,
take independent professional advice at the
Group’s expense.
The composition of the Board will be reviewed
regularly to ensure that the Board has the
appropriate mix of expertise and experience.
The Articles provide that the number of
Directors that may be appointed cannot be
fewer than two. Two Directors present at a
Board meeting will constitute a quorum.
The Board ensures it is aware of the views of
major shareholders through regular meetings in
person (where appropriate), as well as through
discussions with the Company’s joint brokers
and market analysts. Where such information
has been obtained by the CEO, this information
is normally fed back to the rest of the Board in a
timely manner.
Review of Internal Control and Risk
Management systems
The Board has reviewed the Company’s internal
control and risk management systems.
Rainbow Rare Earths Limited has a relatively
small team of management and financial staff,
and is therefore able to retain a tight control
over its financial reporting activities. The Board
does not consider it appropriate to have a
separate internal audit function, however a
number of internal controls and review have
been put in place to provide the Board (and the
Audit Committee) with assurance that the risks
inherent to operating a mining company in more
than one jurisdiction are managed appropriately.
These controls include the following:
X Budgets and forecast are prepared by
finance staff in conjunction with operating
teams, and are reviewed and approved by
senior management (and in the case of the
Budget, by the Board)
X Actual results are reported against Budget
and forecast, and variances examined
X Banking transactions must be authorised by
at least two staff members, one of whom is
a senior manager (normally the CFO)
X Financial operations in Burundi are
reviewed regularly by the CFO, who visits
the operations at least every 2-3 months
(more frequently as required)
X The Group uses a central financial
reporting system (Xero) which records
all transactions, capturing third party
documents (e.g. invoices) which are
reviewed by head office on a monthly basis
X Senior management regularly discuss
material developments (normally weekly),
and consider financial and reporting
implications of any matters arising
In addition to formal Audit Committee meetings,
the CFO has regular interaction with the Audit
Committee Chairman to discuss control and
reporting matters in more detail.
Board of Directors
The Company had one Executive Director and
five Non-Executive Directors at 30 June 2017.
All major decisions relating to the Group are
made by the Board as a whole. Operations are
conducted by the subsidiaries of the Company
(principally Rainbow Mining Burundi SM)
under the direction of the Chairman of each
of the subsidiary companies. The Company is
represented on the board of Rainbow Mining
Burundi SM.
26
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 The Board reviews key business risks regularly, including the financial risks facing the Group in the operation of its business.
These matters include, but are not limited to, the following:
X Determining the strategy for the Company
X Approving the annual Budget
X Discussing and approving financing, including new debt and equity
X Setting the dividend policy
X M&A activity and significant transactions
X Risk management
X Considering and, if appropriate, approving the recommendations of Board Committees
The following table lists the names, positions and ages of the Directors, the year they were appointed, and committee
memberships:
Name
Age1 Position
Appointed
Audit
Remuneration Nominations HSE
Adonis Pouroulis
Shawn McCormick
Alexander Lowrie
Robert Sinclair
Atul Bali
Martin Eales
1 Ages at 30 June 2017
47
50
42
67
46
45
Chairman
5 Aug 2011
Non-exec
4 Feb 2016
-
-
Non-exec
16 Nov 2016
Member
Non-exec
5 Aug 2011
Chair
Non-exec
29 Mar 2017
Member
CEO
8 Sep 2014
-
Member
Member
-
Chair
-
-
Chair
Member
Member
-
-
-
-
Chair
Member
-
-
Member
The Company does not consider Adonis Pouroulis to be independent by virtue of being a significant shareholder. The other
non-executive directors are considered to be independent, in terms of character and judgment, notwithstanding the
following:
X All the non-executives are shareholders in the Company (see table on page 21 for details)
X Shawn McCormick, Adonis Pouroulis and Robert Sinclair held share options during the year (see Note 18 on page 53 for
details);
X Alexander Lowrie and Atul Bali were awarded share options on 23 August 2017;
X Robert Sinclair has a beneficial interest in Artemis Trustees Limited, which provides corporate administration and
secretarial services to the Group.
The table below shows the attendance at Board and committee meetings during the year to 30 June 2017:
Name
Board
Audit
Remuneration Nominations HSE
Adonis Pouroulis
Shawn McCormick
Alexander Lowrie
Robert Sinclair
Atul Bali
Martin Eales
6/7
5/7
4/5
4/7
1/1
7/7
n/a
n/a
0/0
0/0
0/0
n/a
2/2
2/2
n/a
2/2
n/a
n/a
0/0
0/0
0/0
n/a
n/a
n/a
n/a
0/0
0/0
n/a
n/a
0/0
The deliberations of the various committees referred to below, do not reduce the individual and collective responsibilities of
Board members with regard to their fiduciary duties and responsibilities, and they must continue to exercise due care and
judgment in accordance with their statutory obligations.
27
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 CORPORATE GOVERNANCE
These terms of reference are subject to
the provisions of the Articles and any other
applicable law or regulatory provision in force in
Guernsey, and the Listings Rules.
In addition to the Audit, Remuneration,
Nomination and Health, Safety and Environment
Committees which have formally delegated
duties and responsibilities within written terms
of reference the Board may set up additional
Committees as appropriate.
Audit Committee
The Board has established an Audit
Committee with formally delegated duties and
responsibilities. The Audit Committee is chaired
by Robert Sinclair and its other members
Alexander Lowrie and Atul Bali.
The Company considers Robert Sinclair to have
recent and relevant financial experience, by
virtue of his role as a financial adviser and his
experience as Audit Committee Chairman with
other public companies.
The Audit Committee should meet not less than
two times a year and is responsible for ensuring
the financial performance of the Company is
properly reported on and monitored, including
reviews of the annual and interim accounts,
results announcements, internal control
systems and procedures and accounting
policies.
It is also responsible for keeping the
categorisation, monitoring and overall
effectiveness of the Company’s risk assessment
and internal control processes under review.
The Audit Committee was formally established
in January 2017 and did not meet in 2016/17.
The Audit Committee did however meet on
27 July 2017 to approve the audit plan for
the year ended 30 June 2017, and again on 2
October 2017 to consider the 2016/17 financial
statements and year end audit.
The Audit Committee also considered the
conduct of the external audit by BDO LLP,
which was considered to be appropriate. The
Committee therefore resolved to propose BDO
LLP for reappointment at the next AGM for a
period of 12 months. It was noted that BDO
LLP had been auditors of the Company since
October 2016.
The Audit Committee also considered
the independence and objectivity of BDO
LLP, including the provision of non-audit
services. These were limited to advice on the
establishment and operation of the Company’s
share option scheme and acting as Reporting
Accountants for the Company’s IPO. Having
considered the nature of these services, the
non-recurring nature of the fees and the
safeguards implemented to protect audit
independence, such as the fact the services
were led by personnel not involved with the
audit, the provision of these non-audit services
was not considered to compromise BDO LLP’s
audit independence.
Remuneration Committee
The Remuneration Committee is chaired by
Robert Sinclair and its other members are
Adonis Pouroulis and Shawn McCormick. It
is expected to meet not less than two times
a year. The Remuneration Committee has
responsibility for determining, within agreed
terms of reference, the Group’s policy on
the remuneration of senior executives and
specific remuneration packages for executive
Directors and the non-executive Chairman.
The remuneration of non-executive Directors
is a matter for the Board. No Director may be
involved in any discussions as to their own
remuneration. The Remuneration Committee
was established following the IPO in January
2017 and met twice in the year.
Health, Safety and Environment
(‘HSE’) Committee
The HSE Committee is responsible for
developing and reviewing the Group’s
framework, policies and guidelines on safety,
health and environmental management,
monitoring key indicators on accidents and
incidents within the Group’s operations and
considering developments in relevant safety,
health and environmental practices and
regulations.
The HSE Committee is chaired by Shawn
McCormick. The other members of the
committee are Martin Eales and Alexander
Lowrie. It is intended that the committee will
meet at least two times per year. The HSE was
established following the IPO in January 2017
but did not meet formally before 30 June 2017.
Nominations Committee
The Nomination Committee is chaired by
Adonis Pouroulis and its other members are
Alexander Lowrie and Shawn McCormick.
The Nomination Committee is expected to
meet at least once per year. The Nomination
Committee is responsible for reviewing, within
the agreed terms of reference, the structure,
size and composition of the Board, undertaking
succession planning, leading the process
for new Board appointments and making
recommendations to the Board on all new
28
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 All personnel are required to receive guidance
and training in relation to the Group’s Anti-
Bribery Policy and procedures. All senior staff
have already received this training, and the
roll-out to all junior staff is expected during
2017/2018.
The Anti-Bribery Officer also undertakes due
diligence on third parties as appropriate that
are to be engaged by the Group to do business
on its behalf. The Group requires third parties to
take account of the Anti-bribery policy and to
act in accordance with its provisions.
Signed on behalf of the Board of Directors on
3 October 2017
Martin Eales
Chief Executive Officer
appointments and re-appointments of existing
Directors. The Nomination Committee did not
meet between its formation after the IPO in
January 2017, and the end of the financial year
on 30 June 2017, as changes to the directorate
(notably the appointment of Atul Bali as Non-
executive Director on 29 March 2017) were
considered by the Board as a whole.
The Nomination Committee is responsible for
setting the Board’s policy on diversity. This
policy had not been finalised by the end of
the year, however it remains the objective
of the Committee to address this at the
earliest opportunity in 2017/18. No external
consultancies were engaged in the search for
any non-executive Director.
Share dealing policy
The Company has a share dealing policy
requiring all Directors and senior executives
to obtain prior written clearance from either
the Chairman or the Chief Executive Officer to
deal in linked shares. The Chairman requires
prior written clearance from the Chairman of
the Audit Committee. Close periods (as defined
in the share dealing policy) are observed as
required by MAR and other rules that apply to
the Company by virtue of the market on which
its shares are listed. During these periods, the
Company’s Directors, executives and inside
employees are not permitted to deal in the
Company’s securities. Additional close periods
are enforced when the Company or its applicable
employees are in possession of inside information.
Anti-bribery policy
The Company has adopted an Anti-bribery
policy and procedures, which applies to the
Group and its officers and staff anywhere in
the world. The policy and procedures have
been developed following an assessment of
the risks applicable to the Group’s business
and include a process for reporting suspicious
conduct, financial limits on gifts and hospitality,
procedures for financial record-keeping and for
dealing with contracts with third parties, and a
prohibition on charitable or political donations
without Board approval.
Jim Wynn has been appointed as the Group’s
Anti-Bribery Officer and will oversee the day-
to-day operation of the Anti-Bribery Policy
and procedures. The Board will also regularly
review the operation of the Anti-Bribery Policy
and procedures and the Anti-Bribery Officer will
report to the Board on any specific issues that
may arise.
29
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 FINANCIAL
STATEMENTS
30
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 INDEPENDENT AUDITORS’
REPORT
Independent Auditor’s report to members of Rainbow Rare Earths Limited
Opinion
We have audited the financial statements of
Rainbow Rare Earths Limited (“the Group”) for
the year ended 30 June 2017 which comprise
the consolidated statement of comprehensive
income, the consolidated statement of financial
position, the consolidated statement of
changes in equity, the consolidated statement
of cash flows and the related notes to the
financial statements, including a summary of
significant accounting policies. The financial
reporting framework that has been applied in
the preparation Group financial statements
is applicable law and International Financial
Reporting Standards (IFRS’s) as adopted by the
European Union.
In our opinion, the financial statements:
X give a true and fair view of the state of the
Group’s affairs as at 30 June 2017 and of its
loss for the year;
X have been properly prepared in accordance
with IFRS as adopted by the European
Union; and
X have been properly prepared in accordance
with the requirements of the Companies
(Guernsey) Law 2008.
Basis for opinion
We conducted our audit in accordance with
International Standards on Auditing (UK) (“ISAs
(UK)”) and applicable law. Our responsibilities
under those standards are further described in
the Auditor’s responsibilities for the audit of the
financial statements section of our report. We
are independent of the Group in accordance
with the ethical requirements that are relevant
to our audit of the financial statements in the
UK, including the FRC’s Ethical Standard as
applied to listed entities, and we have fulfilled
our other ethical responsibilities in accordance
with these requirements. We believe that the
audit evidence we have obtained is sufficient
and appropriate to provide a basis for our
opinion.
Conclusions relating to going concern
We have nothing to report in respect of the
following matters in relation to which the ISAs
(UK) require us to report to you where:
X the Directors’ use of the going concern
basis of accounting in the preparation of the
financial statements is not appropriate; or
X the Directors have not disclosed in the
financial statements any identified material
uncertainties that may cast significant
doubt about the Group’s ability to continue
to adopt the going concern basis of
accounting for a period of at least twelve
months from the date when the financial
statements are authorised for issue.
Key audit matters (‘KAMs’)
Key audit matters are those matters that, in our
professional judgment, were of most significance
in our audit of the financial statements of the
current period and include the most significant
assessed risks of material misstatement
(whether or not due to fraud) that we identified.
These matters included those which had the
greatest effect on: the overall audit strategy,
the allocation of resources in the audit; and
directing the efforts of the engagement team.
These matters were addressed in the context
of our audit of the financial statements as a
whole, and in forming our opinion thereon, and
we do not provide a separate opinion on these
matters.
KAM Identified
Carrying value and classification of the Gakara
Project
The Group is developing the Gakara Project,
a rare earth deposit in Burundi which was
previously classified as an exploration and
evaluation asset. Notwithstanding that the
Gakara Project is classified as an ‘Exploration
Target’ under JORC rules without a defined
mineral reserve or resource that is commonly
associated with a commercially feasible
project, the Board determined that, given
factors such as the nature of the deposit and
internal assessments, that the commercial and
technical viability of the rare earth deposit had
been established by 30 June 2017. As a result,
the Group reclassified the exploration and
evaluation assets of US$4.6 million to mining
assets.
31
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 INDEPENDENT AUDITORS’
REPORT
At 30 June 2017, the Group’s mining assets totalled $5.8
million and management performed an impairment indicator
review in accordance with IAS 36 which concluded that there
were no indicators of impairment. The impairment indicator
review included an assessment as to whether the current
life of mine plan indicated that the recoverable amount
exceeded the carrying value of the cash generating unit.
The determination that the Gakara Project had achieved
commercial and technical viability to support its
reclassification to mining assets, together with the
assessment of the costs to be transferred, represented
a key judgment by management and a key focus for our
audit. In respect of the impairment indicator review, the
selection of inputs to the life of mine plan required significant
estimation and judgment by management particularly given
the absence of a JORC defined mineral resource and the
development stage of the Gakara Project.
Therefore we considered the impairment indicator review and
the appropriateness of the estimates in the life of mine plan
to be a key focus for our audit, along with the classification of
the assets as mining assets.
How we addressed the audit risk:
X We critically assessed the appropriateness of
management’s judgment that the Gakara Project met
the criteria under IFRS for reclassification to mining
assets, including consideration of the absence of
a JORC defined reserve or resource. As part of this
assessment we reviewed the mining permit, challenged
the assessments by internal geologists and mine
planners and reviewed the Group’s strategy and
business plans. Further, we reviewed the independent
Competent Person’s Report and discussed the findings
with the Competent Person to consider its impact on the
accounting judgment by the Group.
X We assessed whether management’s judgment that
the exploration and evaluation costs attributable to
the Gakara mining permit area as a whole should be
reclassified to mining assets, as opposed to certain areas
of the permit, was appropriate. We verified the costs
transferred to accounting records.
X We evaluated management’s impairment indicator
review. In doing so we considered factors such as the
recent IPO valuation and year end market capitalisation
against the carrying value of assets. We assessed
the progress of the Gakara mine construction for
indicators of impairment, supported by our mine site
visit and review of internal project reports. We reviewed
management’s life of mine plan and the associated
future discounted cash flows. We critically assessed the
level of production and grade assumed in the forecasts
compared to the range in the Competent Person’s
Report and challenged internal assessments of forecast
production made by the Group’s geologists. Our testing
included a comparison of forecast rare earth prices to
market data and trends, assessment of assumptions
including future customer discounts against
correspondence with thyssenkrupp, forecast costs and
an assessment of the discount rate.
X We challenged management’s sensitivity assessments
and performed our own sensitivity calculations in
respect of factors such as rare earth prices, customer
discounts and discount rates.
X We evaluated the accounting policy and disclosures in
note 3 based on our audit procedures.
Our findings:
We found the Group’s assessment that the Gakara Project
had reached commercial and technical feasibility to justify
its reclassification to mining assets to be applicable based on
the facts and circumstances. We found the costs transferred
to be appropriate. We found the Group’s assessment that
there were no impairment indicators at the reporting date
to be reasonable, with the key assumptions in the life of
mine plan being considered and balanced. We found the
disclosures in the financial statements to be relevant and
informative.
Funding position
The Group raised US$8 million through share placings as
part of its IPO in January 2017 to fund the development of
the Gakara Project with first production and revenue receipts
forecasted in Q4 2017.
During our planning phase, whilst the Group’s forecasts
indicated that it maintained sufficient liquidity, the forecasts
were sensitive to any delays associated with the date of first
revenue receipts, as well as factors such as cost escalation,
rare earth prices and customer discounts. To protect against
an adverse scenario management are currently in the
process of agreeing an overdraft facility with Finbank SA and
have received support from the Group’s largest shareholder
that it will provide financial support should the need arise
within the next 12 months.
The forecasts and the Board’s assessment of the
appropriateness of the going concern assumption involved
significant judgment and estimation and was therefore
considered to represent a key focus area for our audit.
How we addressed the audit risk:
X We critically assessed management’s cash flow forecast
and the underlying assumptions. Our testing included
a comparison of forecast rare earth prices to market
data and trends, assessment of assumptions including
future customer discounts against correspondence with
thyssenkrupp and assessment of the consistency of
production and operating cost assumptions with the life
of mine plan.
X We assessed the forecast capital expenditure still to be
incurred against the original project plan and considered
the quality of management estimates based on factors
such as the performance to date against original
budgets. We visited the Gakara Project, reviewed internal
project reports and met with operational management
to understand the progress of works. We challenged
management regarding potential risks associated with
the timing of first production and revenue receipts.
32
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 X We critically assessed management’s sensitivity analysis
and performed our own sensitivity analysis in respect
of the key assumptions underpinning the forecasts. The
sensitivities included the timing of first production and
revenue receipts and demonstrated that whilst the Group
forecast headroom being maintained from existing cash
resources, additional working capital would be required in
the event of reasonable downside sensitivities.
X We considered and challenged the Board’s assessment
that the Group would have access to sufficient funding to
mitigate the reasonable downside sensitivity scenarios
based on a proposed overdraft facility and commitments
from the Group’s largest shareholder regarding financial
support if required, until such time as an appropriate
overdraft facility is in place. We verified the existence
of the term sheet in respect of the proposed overdraft
facility and obtained written representations from the
Board regarding their expectation that the facility would
be obtained during October 2017 and considered the
appropriateness of this judgment. We verified the written
confirmation of financial support provided by the Group’s
largest shareholder and considered the ability of the
counterparty to meet such a commitment.
X We evaluated the disclosures in note 2 based on our
audit procedures.
Our findings:
We found the Group’s judgment that the going concern basis
of preparation is applicable to be appropriate based on its
forecasts, noting that the Group’s forecasts demonstrate
that headroom will remain available and that the Board has a
reasonable expectation of additional funding being available
to mitigate a downside sensitivity scenario, if required. The
judgment regarding the availability of additional funding was
considered appropriate given the status of the proposed
overdraft facility and the written commitments of financial
support from the Group’s largest shareholder. In forming
that assessment, we found the Group’s cash flow forecasts
and consideration of risks and sensitivities to be balanced
and appropriate. We found the disclosures included in the
financial statements to be relevant and informative.
Our application of materiality
Group materiality for FY 2017: US$140,000
Basis for materiality: 1.5% of total assets of US$9.2 million
We consider total assets to be the financial metric of the
most interest to shareholders and other users of the financial
statements and therefore consider this to be an appropriate
basis for materiality.
We agreed with the audit committee that we would report
to the committee all individual audit differences identified
during the course of our audit in excess of $7,000. We also
agreed to report differences below these thresholds that, in
our view, warranted reporting on qualitative grounds. There
were no misstatements identified during the course of our
audit that were individually, or in aggregate, considered to
be material in terms of their absolute monetary value or on
qualitative grounds.
We apply the concept of materiality both in planning
and performing our audit, and in evaluating the effect of
misstatements. We consider materiality to be the magnitude
by which misstatements, including omissions, could influence
the economic decisions of reasonable users that are taken
on the basis of the financial statements. Importantly,
misstatements below these levels will not necessarily be
evaluated as immaterial as we also take account of the nature
of identified misstatements, and the particular circumstances
of their occurrence, when evaluating their effect on the
financial statements as a whole.
An overview of the scope of our audit
Whilst Rainbow Rare Earths Limited is a company registered
in Guernsey and listed on the Standard Segment of the
London Stock Exchange in the UK, the Group’s principal
operations are located in Burundi. In approaching the audit
we considered how the Group is organised and managed. We
assessed the business as being principally a single project
being the operation of the Gakara Mine in Burundi.
Our Group audit scope focused on the Group’s significant
components which comprised two Burundian operating
subsidiaries, one BVI subsidiary and a corporate head office
function. Whilst materiality for the financial statements as a
whole was US$140,000, each component of the Group was
audited or subject to review procedures to a lower level of
materiality. The significant components accounted for 100%
of total assets and were subject to audits conducted by BDO
LLP using a team with experience of auditing in the mining
industry, in Africa and with publically listed entities. The
one non-significant component was principally subject to
analytical review procedures.
We set out above the risks that had the greatest impact on
our audit strategy and scope. As part of our audit strategy
the Responsible Individual (audit engagement partner)
visited the principal location in Burundi to observe the
operations of the mine.
Other information
The Directors are responsible for the other information. The
other information comprises the information included in
the annual report, other than the financial statements and
our Auditor’s report thereon. Our opinion on the financial
statements does not cover the other information and, except
to the extent otherwise explicitly stated in our report, we do
not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing
so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge
obtained in the audit or otherwise appears to be materially
misstated. If we identify such material inconsistencies
or apparent material misstatements, we are required to
determine whether there is a material misstatement in the
financial statements or a material misstatement of the other
information. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact.
We have nothing to report in this regard.
33
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 INDEPENDENT AUDITORS’
REPORT
Matters on which we are required to report by
exception
We have nothing to report in respect of the following matters
where the Companies (Guernsey) Law, 2008 requires us to
report to you if, in our opinion:
X proper accounting records have not been kept by the
Company; or
X the financial statements are not in agreement with the
accounting records; or
X we have failed to obtain all the information and
explanations which, to the best of our knowledge and
belief, are necessary for the purposes of our audit.
Responsibilities of Directors
As explained more fully in the Directors’ responsibilities
statement, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they
give a true and fair view, and for such internal control as the
Directors determines is necessary to enable the preparation
of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are
responsible for assessing the Group’s ability to continue as
a going concern, disclosing, as applicable, matters related
to going concern and using the going concern basis of
accounting unless the Directors either intend to liquidate the
Group or to cease operations, or have no realistic alternative
but to do so.
Auditor’s responsibilities for the audit of the
financial statements
This report is made solely to the Company’s members, as
a body, in accordance with Section 262 of the Companies
(Guernsey) Law. Our audit work has been undertaken so that
we might state to the Company’s members those matters
we are required to state to them in an Auditor’s report and
for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other
than the Company and the Company’s members as a body,
for our audit work, for this report, or for the opinions we have
formed.
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error,
and to issue an Auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance with
ISAs (UK) will always detect a material misstatement when
it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they
could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the Financial Reporting
Council’s website at: www.frc.org.uk/auditorsresponsibilities.
This description forms part of our Auditor’s report.
Ryan Ferguson
For and on behalf of BDO LLP, Chartered Accountants and
Recognised Auditor
London, United Kingdom
3 October 2017
BDO LLP is a limited liability partnership registered in England and Wales (with
registered number OC305127).
34
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
For the year ended 30 June 2017
Operating expenses:
Administration expenses
Exploration expenditure
TOTAL OPERATING EXPENSES
Loss from operating activities
Finance Income
Finance costs
Loss before tax
Income tax expense
Year ended
30 June 2017
Year ended
30 June 2016
Notes
US$’000
US$’000
(1,336)
(95)
(1,431)
(1,431)
185
(156)
(623)
(51)
(674)
(674)
-
(526)
(1,402)
(1,200)
-
-
4
5
5
8
Total loss after tax and comprehensive expense for the year
(1,402)
(1,200)
Total loss after tax and comprehensive expense for the year is attributable to:
Non-controlling interest
Owners of parent
The results of each year are derived from continuing operations:
Loss per share
Basic
Diluted
*Adjusted for share consolidation in 2017
Notes on pages 39 to 58 form part of these financial statements.
19
9
9
(13)
(1,389)
(1,402)
(6)
(1,194)
(1,200)
(0.01)
(0.01)
(0.01)*
(0.01)*
35
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
As at 30 June 2017
Non-current assets
Exploration and evaluation assets
Plant, property and equipment
Prepayments
Total non-current assets
Current assets
Prepayments
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Borrowings
Trade and other payables
Total current liabilities
Total liabilities
Net Assets
Equity and liabilities
Share capital
Share based payment reserve
Other reserves
Retained loss
Equity attributable to the parent
Non-controlling interest
Total Equity
Year ended
30 June 2017
Year ended
30 June 2016
Notes
US$’000
US$’000
10
11
12
12
13
14
15
16
18
19
-
5,791
182
5,973
22
3,198
3,220
9,193
(20)
(429)
(449)
(449)
8,744
13,186
494
40
(4,982)
8,738
6
8,744
3,827
1
-
3,828
-
70
70
3,898
(1,653)
(765)
(2,418)
(2,418)
1,480
5,042
-
40
(3,621)
1,461
19
1,480
These financial statements were approved and authorised for issue by the Board of Directors on 3 October 2017 and signed on
its behalf by:
Martin Eales
Chief Executive Officer
Notes on pages 39 to 58 form part of these financial statements..
36
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 CONSOLIDATED STATEMENT OF
CHANGES IN EQUITY
For the year ended 30 June 2017
Share
capital
US$’000
Share
Based
Payments
US$’000
Equity
reserve
US$’000
Other
reserves
US$’000
Accumulated
losses
US$’000
Attributable
to the parent
US$’000
Non-
controlling
interest
US$’000
Total
US$’000
-
-
-
-
-
-
-
-
-
Balance at 01 July 2015
4,942
Total comprehensive expense
Loss and total comprehensive
loss for year
Transactions with owners
Issue of convertible loan note
Extinguishment of convertible
loan note
Issue of warrants (note 18)
-
-
-
-
Issue of shares during the year
(net of costs)
100
Balance at 30 June 2016
5,042
Total comprehensive expense
Loss and total comprehensive
loss for year
Transactions with owners
Extinguishment of convertible
loan (notes 5 and 16c)
IPO Transaction costs (note
16e)
Share Based payment reserve
(note 18)
Issue of shares during the year
(note 16)
-
-
(778)
-
494
8,922
-
-
-
70
(70)
-
-
-
-
-
-
-
-
-
Notes on pages 39 to 58 form part of these financial statements.
-
-
-
-
40
-
(2,497)
2,445
25
2,470
(1,194)
(1,194)
(6)
(1,200)
-
70
-
-
70
-
40
100
-
-
-
-
70
-
40
100
40
(3,621)
1,461
19
1,480
(1,389)
(1,389)
(13)
(1,402)
-
-
-
-
-
28
-
-
-
28
(778)
494
8,922
Balance at 30 June 2017
13,186
494
40
(4,982)
8,738
28
(778)
494
8,922
8,744
-
-
-
6
37
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 CONSOLIDATED
CASH FLOW STATEMENT
For the year ended 30 June 2017
Cash flow from operating activities
Loss after tax for the year
Adjustments for:
Share based payment charge
Finance costs
Finance income
Net (increase)/decrease in prepayments
Net increase/(decrease) in trade and other payables
Net cash used in operating activities
Cash flow from investing activities
Purchase of exploration and evaluation assets
Purchase of property, plant and equipment
Net cash used in investing activities
Cash flow from financing activities
Proceeds of new borrowings
Repayment of borrowings
Proceeds from the issuance of ordinary shares
Transaction costs of issuing new equity
Net cash generated by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Foreign exchange gains on cash and cash equivalents
Cash and cash equivalents at the end of the year
Notes on pages 39 to 58 form part of these financial statements.
For year ended
30 June 2017
For year ended
30 June 2016
Notes
US$’000
US$’000
(1,402)
(1,200)
18
5
5
10, 26
11, 26
16c
14
16d
494
156
(185)
(16)
109
(844)
(769)
(1,363)
(2,132)
250
(1,700)
7,854
(444)
5,960
2,984
70
144
3,198
-
526
-
19
(35)
(690)
(583)
-
(583)
1,264
-
71
-
1,335
62
8
-
70
38
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 NOTES TO THE CONSOLIDATED
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 address of 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 2017 and 30 June 2016 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
In January 2017, the Company raised US$8 million, to be used to finance the construction of the Gakara mine, which is
expected to enter into production and generate first sale proceeds during Q4 2017.
The Board have considered detailed cash flow forecasts and sensitivity analysis for a period to 31 December 2018. The
forecasts demonstrate that provided revenues from the first shipment are received towards the earlier part of Q4 2017, the
Group will maintain positive cash headroom throughout the next 12 months. If sales revenues are delayed, for example due to
issues in the commissioning and ramp-up at the plant, or difficulties in exporting the first shipments of mineral concentrate,
it is likely that existing cash balances will be insufficient. Accordingly, the Board have considered reasonable and stress
case sensitivity scenarios to assess the potential funding required under such eventualities, notwithstanding that the Board
continues to anticipate production and sale proceeds being received in the earlier part of Q4 2017.
To protect against such an eventuality, during September 2017, the Company agreed in principle an overdraft facility with
Finbank SA, a Burundian bank, for up to US$1.5m, which would provide adequate headroom throughout the period in the
event of such a scenario materialising. In addition, the Company has received a letter of support from Pella Resources, the
Company’s largest shareholder confirming that it will make available funding to the Company should the need arise, for a
period up until 31 December 2018.
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 2017.
Standards in issue but not effective
The standards which were issued and effective for periods starting on or after 1 July 2016 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, which are not yet mandatory in the EU.
Standard
IFRS 9
IFRS 15
IFRS 16*
IFRIC 22
Description
Financial instruments
Revenue from Contracts with Customers
Leases
Foreign Currency Translations and Advance Consideration
Effective date
1 January 2018
1 January 2018
1 January 2019
1 January 2018
Amendments to IFRS 2
Classification and Measurement of Share-based Payment Transactions
1 January 2018
* not yet adopted by the European Union
The Group is currently assessing the impact of these standards on the financial statements for future periods including the
impact on the measurement and presentation of its financial instruments.
39
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
IFRS 15 Revenue from contracts with customers
The new standard was issued in May 2014. IFRS 15 is intended to introduce a single framework for revenue recognition
and clarify principles of revenue recognition. This standard modifies the determination of when to recognise revenue and
how much revenue to recognise. The new standard becomes mandatory for financial years beginning on or after 1 January
2018. The effect of applying IFRS 15 will be assessed and disclosure will be made once the Group has commenced sales of
concentrate.
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 is currently assessing the impact of this standard however
based on current operations do not expect this standard to have a material impact on the financial statements.
IFRS 16 Leases
The new standard was issued in January 2016 replacing the previous leases standard, IAS 17 Leases, and related
Interpretations. IFRS 16 establishes the principles for the recognition, measurement, presentation and disclosure of leases
for the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 eliminates the classification of leases as either operating or
finance as is required by IAS 17 and, instead, introduces a single lessee accounting model requiring a lessee to recognise
assets and liabilities for all leases unless the underlying asset has a low value or the lease term is twelve months or less. This
new standard applies to annual reporting periods beginning on or after 1 January 2019 subject to EU endorsement. This new
standard, based on the Group’s current operations, is not expected to have a material impact on the financial statements.
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. 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.
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
40
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 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 mining permit has
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, process plant, mining equipment and vehicles, computer
equipment, motor vehicles, 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.
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 within mining and other equipment:
Useful life:
Mine development costs
Process plant
Mining equipment and vehicles
Computer equipment
Office furniture and fittings
Deferred stripping costs
Life of mine
Life of mine
5 years
3 years
7 years
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
(i.e. 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:
X 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;
41
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
X whether substantive expenditure on further exploration for and evaluation of mineral resources in a specific area is
neither budgeted nor planned;
X 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
X 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.
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.
42
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 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.
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 the exploration and evaluation of rare earths.
43
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
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:
Exploration and evaluation asset recognition (note 10)
Qualifying exploration and evaluation costs are initially classified and held as intangible fixed assets rather than being
expensed. In recording costs as exploration and evaluation assets, judgment is required as to the extent to which the costs
are attributable to the discovery of specific mineral resources and include both internal and external costs.
The carrying values of intangible exploration and evaluation assets were assessed for indicators of impairment prior to
transfer to plant, property and equipment and at 30 June 2016 based on an estimation of the recoverability of the cost pool
from expected future development and production of the related rare earth potential reserves and resources. In forming this
assessment, the Group considered the external Competent Person’s Report into the project, the status of its permits and
internal economic models and financing which supported the carrying value of the project. No triggers of impairment were
identified at the point of transfer to plant, property and equipment or at 30 June 2016.
Transfer to plant, property and equipment (note 11)
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.
44
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 Carrying value of plant, property and equipment (note 11)
The group assessed at 30 June 2017 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 2017, the carrying value of the Company’s fixed assets was US$6.0 million, considerably lower than its net asset
value according to management forecasts. 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 by 3 October 2017, the basket price for
the Company’s rare earth concentrate had risen over 70% since 1 January 2017, construction work is proceeding largely on
schedule, and geological discoveries have been consistently better than initial expectations.
In addition, as part of the impairment indicator assessment, Management have assessed 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 but required estimates of rare earth reserves and resources with reference to the Competent Person’s Report
and 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 model assessed for the purposes of identifying potential impairment
indicators was prepared using a minimum production target significantly below the upper end range of 80,000 tonnes of
material grading identified in the Competent Person’s Report and for which management and the Competent Person’s Report
forecast further upside as the geology of the ore body is further explored. It is noted that the project is currently categorised
at an Exploration Target by the Competent Person’s Report and therefore does not qualify as a measured resource. However,
given the nature of the deposit, internal studies and historical data the Board consider the minimum production target to be
conservative.
Management therefore concluded that these facts did not indicate that a trigger for impairment existed and no impairments
were recognised.
Share based payments (note 18)
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
Costs associated with the IPO 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
and US$0.8 million of costs were deducted from equity.
Decommissioning, site rehabilitation and environmental costs
The Group’s mining and exploration activities are subject to various laws and regulations governing the protection of the
environment. The Group recognises management’s best estimate of the rehabilitation costs in the period in which they
are incurred. Actual costs incurred in future periods could differ materially from the estimates. Additionally, future changes
to environmental laws and regulations, life of mine estimates and discount rates could affect the carrying amount of this
provision. The Board assessed the extent of rehabilitation and decommissioning required as at 30 June 2017 and concluded
that the effect was immaterial given the nature of the works that had been performed at that date and the requirements
under legislation, the mining permit and Environmental Management Plan.
45
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
4. Loss From Operating Activities
Operating loss includes:
Professional fees in relation to the IPO
Share based payment
Audit of the Group and Company financial statements
Non-audit related service fees
Foreign exchange gain
5. Finance Costs and Income
Finance costs
Effective interest charge on borrowings
Loss on extinguishment of convertible loan notes (note 14)
Fair value movement in derivative and interest charge on convertible loan notes (note 16c)
Total
Finance income
Gain on extinguishment of convertible loan notes (note 14)
Total finance income
Year Ended
30 June 2017
US$’000
Year Ended
30 June 2016
US$’000
(284)
(494)
(42)
(87)
229
-
-
-
(8)
52
Year Ended
30 June 2017
US$’000
Year Ended
30 June 2016
US$’000
128
-
28
156
191
335
-
526
Year Ended
30 June 2017
US$’000
Year Ended
30 June 2016
US$’000
185
185
-
-
The interest charge related primarily to the Pala loan facility, which was repaid during the year (see note 14). The credit 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$1.7 million.
6. Remuneration Of Key Management Personnel
Key management personnel are defined as being Executive and Non-executive Directors and Persons Discharging Managerial
Responsibility (‘PDMRs’), who are in effect the members of the Executive Committee and are set out on pages 23 and 24.
Their remuneration for the 12 months ended 30 June 2016 and 30 June 2017 is summarised as follows:
Wages and salaries
Benefits
Share-based payments
Total remuneration of key management personnel
Benefits paid to employees include healthcare and pension contributions.
46
Year Ended
30 June 2017
US$’000
Year Ended
30 June 2016
US$’000
693
15
483
1,191
249
-
-
249
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 7. Total Employee Remuneration (Including Key Management Personnel)
Wages and salaries
Benefits
Share-based payments
Total employee remuneration
The average number of employees during the period were made up as follows:
Directors
Management and administration
Mining, processing and exploration staff
Total employees
Year Ended
30 June 2017
US$’000
Year Ended
30 June 2016
US$’000
877
20
494
1,391
415
-
-
415
Year Ended
30 June 2017
Year Ended
30 June 2016
5
7
16
28
4
4
-
8
Following the IPO in January 2017, the Company began the recruitment of management and operating staff. By 30 June 2017,
the Company had 123 employees, including 6 Directors, 9 management and administration staff, and 108 mining, processing
and exploration staff.
8. Income Tax Expense
Current tax expense
Deferred tax expense
Total tax expense for the year
Year Ended
30 June 2017
US$’000
Year Ended
30 June 2016
US$’000
-
-
-
-
-
-
The difference between the total tax expense shown above and the amount calculated by applying the standard rate of
corporation tax to the loss before tax is as follows:
Loss of the year
Income tax using the Guernsey rate of 0% :
Effects of:
Differences in tax rates
Tax losses carried forward
Year Ended
30 June 2017
US$’000
Year Ended
30 June 2016
US$’000
(1,402)
-
(163)
163
-
(1,200)
-
(120)
120
-
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%.
47
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
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 Company, 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 Ltd are US$1k (30
June 2016: US$nil), Rainbow Burundi SPRL US$103k (30 June 2016: US$97k), and in respect of Rainbow Mining Burundi SM
they are US$60k (30 June 2016: US$23k).
9. Loss Per Share
The earnings per share calculations for 30 June 2017 reflect the changes to the number of ordinary shares during the
period. On 9 January 2017, each ordinary share was subdivided into 66 new shares, which increased the number of shares
by 80,640,516. On 30 January 2017, the Company underwent an Initial Public Offering, which included the allotment of
65,036,958 new shares to subscribers, and 5,126,507 shares to settle outstanding creditors, while on 1 February 2017,
2,600,665 shares were issued in respect of commissions and underwriting discounts. Earnings per share have been
calculated using the weighted average of ordinary shares, adjusted for the effect of the share subdivision, in order for the
calculations of basic and diluted earnings per share for all periods presented to be comparable. The Company was loss making
for all periods presented, therefore the dilutive effect of share options has not been taken account of in the calculation of
diluted earnings per share, since this would decrease the loss per share for each of the period reported.
At 30 June 2016
At 30 June 2017
Weighted number of ordinary shares
81,834,808
112,135,616
Loss for the year (US$’000)
(1,402)
(1,200)
(1,402)
(1,200)
Weighted average number of ordinary shares in
issue during the year
112,135,616
81,834,808
112,135,616
81,834,808
Loss per share (cents)
0.01
0.01
0.01
0.01
Basic 2017
Basic 2016
Diluted 2017
Diluted 2016
The weighted average number of shares for 2016 has been adjusted for the effect of the share sub-division during 2017. The
previously presented weighted average number of ordinary shares in 2016 was 1,218,105, equivalent to 81,834,808 if the share
consolidation had taken place at the start of 2016. At 30 June 2017, there were 10,120,324 (2016: 427,924) potentially dilutive
shares in issue through warrants and options.
10. Exploration and Evaluation Assets
At 1 July 2015
Additions
At 30 June 2016
At 1 July 2016
Additions in year
Transfer to plant, property and equipment (note 11)
At 30 June 2017
Total
US$’000
3,275
552
3,827
3,827
776
(4,603)
-
The Group has a 100% interest, held through its wholly owned subsidiary, Rainbow International Resources Limited, in the
135km² Gakara rare earths exploration licence in Burundi which was granted by Presidential decree in May 2011 for an initial
licence period of 3 years and was renewed in June 2014 for a period of 2 years and was further renewed in September 2016
for 2 years.
48
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017
The Group, through its 90% owned Burundian subsidiary, Rainbow Mining Burundi SM, was granted a 25 year mining licence in
April 2015 for a 39km² portion of the Gakara project area.
At 30 June 2017, the total value of exploration costs previously capitalised as intangible assets in respect of the Gakara project
were transferred to plant, property and equipment, in accordance with the Company’s accounting policies (see Note 2).
11. Plant, Property and Equipment
Year ended 30 June 2017
US$’000
US$’000
US$’000
US$’000
US$’000
Mine
development
costs
Plant and
machinery
Vehicles
Office
equipment
Total
Cost
At 1 July 2016
Transfer from exploration and evaluation assets
Additions
At 30 June 2017
Depreciation
At 1 July 2016
Charge for year
At 30 June 2017
–
4,603
–
4,603
–
–
–
–
–
1,016
1,016
–
–
–
Net Book Value at 30 June 2017
4,603
1,016
Net Book Value at 30 June 2016
Net Book Value at 30 June 2015
–
–
–
–
–
–
169
169
–
–
–
169
–
–
1
2
3
–
–
–
3
1
1
1
4,603
1,187
5,791
–
–
–
5,791
1
1
During the year, capitalised costs of US$4.6 million, which had previously been classified under intangible assets, were
transferred to tangible fixed assets (see note 10 above).
No depreciation charge was applied during the year, as the Gakara project had not yet entered into production. Assets will
be depreciated over their useful economic lives, in accordance with the Company’s accounting policies, once production
commences (expected to be during Q4 2017).
12. Prepayments
Non-current prepayments
Current prepayments
Total prepayments
Year Ended
30 June 2017
Year Ended
30 June 2016
US$’000
US US$’000
182
22
204
-
-
-
Non-current prepayments relate to advance payments on equipment for the Gakara project.
49
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
13. Cash and Cash Equivalents
Cash at bank and in hand
No cash amounts were restricted at 30 June 2017 (30 June 2016: nil).
14. Borrowings
Current
Arc Securities
Pala Investments Limited
(A) Terms of Loan – Arc Securities
Year Ended
30 June 2017
Year Ended
30 June 2016
US$’000
US US$’000
3,198
3,198
70
70
Year Ended
30 June 2017
Year Ended
30 June 2016
US$’000
US US$’000
(A)
(B)
20
-
20
20
1,633
1,653
The US$20k loan from Arc Securities is unsecured, bears no interest and is repayable on demand, and was drawn in March
2014. Arc Securities is a related party (see Note 21)
(B) Terms of Convertible Loan - Pala Investments Limited
On 31 October 2015 the Group entered into a US$6m loan facility agreement with Pala Investments Limited. Upon entering
into the agreement the Group issued US$1.5m of convertible loan notes, which were convertible at any time prior to maturity
at the discretion of the holder, into Ordinary Shares with the number of shares equivalent to the principal divided by
US$14.407 per share.
On 5 April 2016 the Group agreed with Pala Investments Limited to vary the terms of the agreement. The maturity date was
amended to 31 January 2017 and the loan notes could only be converted if the Group defaulted on the loan on this date.
The conversion rate remained unchanged. The convertible loan notes were extinguished and replaced with an amended
convertible loan. The fair value of the equity component of the revised convertible loan note was considered to be immaterial.
The fair value of the liability component of the new convertible loan was US$1.6m discounted at a market rate of 13%. The
variation of terms gave rise to a loss on extinguishment of the liability of US$335k which substantially related to unamortised
original transaction costs. The interest charge accreted over the loan period with US$191k (old and new instrument) having
been charged for the period to 30 June 2016.
Pursuant to an amendment agreement dated 19 December 2016, this loan was repaid in the amount of US$1.7m on 31 January
2017. The carrying value of the loan at date of repayment was US$1.76m with a total of $1.89m due to Pala (including fees
of US$132k and accrued effective interest of US$263k). The fees were waived and upon final settlement a gain of $185k
recognised in finance income. The interest charged for the period to 31 January 2017 was US$128k recognised in finance costs.
50
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017
15. Trade and Other Payables
Trade payable
Accrued expenses
Payroll taxes
Amounts due to staff and management
Pension contributions
Amounts owed to shareholders
Other payables
Total trade and other payables
Year Ended
30 June 2017
Year Ended
30 June 2016
US$’000
US$’000
61
64
17
135
10
126
16
429
127
96
18
338
-
170
16
765
The average terms for trade and other payables are 30 days.
The Directors consider that the carrying value of trade and other payables approximate to their fair value.
16. SHARE CAPITAL
Share Capital
Total trade and other payables
The shares issued have no par value.
The table below shows a reconciliation of share capital movement in the year:
At 30 June 2015
July 2015 – rights issue
At 30 June 2016
January 2017 – 1:67 share subdivision
January 2017 – share allotments to settle debt and other creditors
January 2017 – share allotment as part of IPO
January 2017 - IPO costs relating to new shares
February 2017 – share allotments
At 30 June 2017
Shares issued during the year
Year Ended
30 June 2017
Year Ended
30 June 2016
US$’000
US$’000
13,186
13,186
5,042
5,042
Note
Number of shares
Value (US$’000)
a
b
c
d
e
f
1,211,826
10,000
1,221,826
80,640,516
5,126,507
65,036,958
-
2,600,665
154,626,472
4,942
100
5,042
-
602
8,000
(778)
320
13,186
a. On 17 June 2015 the Company undertook a rights issue to existing shareholders of 8.25 shares for every 1,000 shares
held. The rights issue subscription was opened on 17 June 2015 and closed on 16 July 2015. Share subscriptions totalling
US$100k were received for the issue of 10,000 shares at US$10 per share.
b. On 9 January 2017, the Company subdivided each of its existing ordinary shares (1,221,826) into 67 ordinary shares
(81,862,342).
51
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
c. On 30 January 2017, the Company issued 2,868,151 ordinary shares at 10p (12.3 cents) per share to various creditors and
key management personnel shown below to settle amounts owing. On the same day, it also issued 2,258,356 ordinary
shares to Alpha Future Investments at a discounted price of 9p (11.1 cents) per share on the conversion of its loan as
explained below.
Cesare Morelli*
Gilbert Midende*
Martin Eales*
Alpha Future Investments
Other creditors
No of shares
US$’000
612,559
746,647
786,579
2,258,356
722,366
5,126,507
75
91
96
250
90
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.
d. 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 $0.15m
in foreign exchange following the settlement of the funds).
e. Costs in relation to the allotment of new shares as part of the IPO amounted to US$778k. This amount has been set off
against share capital.
f. On 2 February 2017, the Company issued 2,600,665 ordinary shares for commissions and early subscription discounts in
relation to the issuance of the 65 million shares, as follows:
Early subscription discounts
Alexander Lowrie (including related parties)*
Other members of Lowrie family
Commissions
Alexander Lowrie*
Atul Bali*
Other commissions
* are transactions with related parties (see note 21).
52
No of shares
US$’000
333,333
627,776
961,109
380,126
339,430
920,000
1,639,556
2,600,665
41
77
118
47
42
113
202
320
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017
17. Reserves
Reserve
Share capital
Purpose
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 2017. Refer to note 19 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 on page 37.
18. Share Options and Warrants
Employee share options
The Company issued a total of 9,692,400 share options in the year 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.
Options held at
30 June 2016
Exercised/
cancelled
during the
period
Granted during
the period
Options held at
30 June 2017
Exercise price
(pence)
Date of grant
Date from
which
exercisable1
A Pouroulis
C Morelli
G Midende
M Eales2
R Sinclair
S McCormick
J Wynn2
B Jankowitz2
Others
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
402,000
944,700
944,700
402,000
944,700
944,700
3,500,000
3,500,000
350,000
350,000
1,500,000
1,500,000
201,000
350,000
350,000
1,500,000
1,500,000
201,000
9,692,400
9,692,400
10.00
10.00
10.00
10.00
10.00
10.00
12.75
12.75
10.00
10.85
30-Jan-17
30-Jan-17
30-Jan-17
30-Jan-17
30-Jan-17
30-Jan-17
30-Jan-17
30-Jan-17
30-Jan-17
30-Jan-17
30-Jan-17
30-Jan-17
27-Jun-17
27-Jun-17
27-Jun-17
27-Jun-17
30-Jan-17
30-Jan-17
1 All awards made in the year 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.
2 4,333,333 share options awarded to M Eales, J Wynn and B Jankowitz 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. These performance conditions are forecast to vest based on
management’s best estimate.
53
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
At 30 June 2017, the following share options are exercisable and outstanding:
Outstanding at 1 July 2016
Granted during the year
Exercised in the year
Cancelled or expired in the year
Outstanding at 30 June 2017, of which:
-
-
Exercisable
Not exercisable
Warrants
Average weighted
exercise price
Fair value
(US$’000)
Number
-
-
9,692,400
10.85 pence
-
-
-
-
9,692,400
10.85 pence
3,230,800
10.85 pence
6,461,600
10.85 pence
-
1,033
-
-
1,033
344
689
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 the Pala funding.
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 2017, the following share warrants were outstanding:
Outstanding at 1 July 2016
January 2017 – 1:67 share subdivision
Exercisable at 30 June 2017
Number
Exercise price
6,293
421,631
427,924
US$14.30
-
US$0.21
Fair value
(US$’000)
40
-
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 price (GBP)
Exercise price (GBP)
Expected volatility
Risk-free rate
Rate of Exchange
Contractual life (years)
Share Options
awarded
30 January 2017
Share Options
awarded
27 June 2017
0.10
0.10
90%
1.8%
1.23
7
0.1275
0.1275
90%
1.8%
1.30273
7
Warrants
10.83
10.83
50%
1.8%
1.32
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.
54
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 19. Non-Controlling Interest
The non-controlling interests of the Group’s partners in its operations are presented in the table below:
Name of subsidiary:
Country:
Effective non-controlling interest 2016
As at 1 July 2015
Loss for year
At 30 June 2016
Effective non-controlling interest 2016/17
As at 1 July 2016
Loss for year
At 30 June 2017
Assets at year-end:
30 June 2016
30 June 2017
Liabilities at year-end:
30 June 2016
30 June 2017
Loss for the year to:
30 June 2016
30 June 2017
Rainbow Burundi SPRL
Rainbow Mining Burundi SM
Burundi
US$’000
Burundi
US$’000
3%
3
2
5
3%
5
1
6
1,179
1,229
1,469
1,539
53
20
10%
(28)
4
(24)
10%
(24)
12
(12)
180
2,358
(64)
2,237
43
123
20. Capital Commitments
On 10 March 2017, the Company entered into an agreement with Obsideo Consulting Pty Ltd for the design, supply, and
installation of a rare earths concentrator plant, for a total of ZAR 23.3 million (US$1.8 million). As at 30 June 2017, a total of
US$1.0 million had been incurred under this contract, therefore US$0.8 million should be considered a capital commitment at
the year end.
55
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
21. Related Party Transactions
Charged in
the year 2017
US$’000
Balance as at
30 June 2017
US$’000
Charged in
the year 2016
US$’000
Balance as at
30 June 2016
US$’000
Related
party
32
120
R Sinclair
Artemis Trustees Limited
Alexander Lowrie
Arc Securities
Atul Bali
Gilbert Midende
Martin Eales
Pella Resources Limited
Sutton Consulting
Uvumbuzi Resources
Limited
Benzu Minerals
56
88
-
42
34
-
20
-
54
12
76
-
20
-
2
122
43
-
8
-
306
271
-
-
-
-
-
22
-
46
18
118
Description
Company secretarial
services to the Group
Shares allotted as
underwriting discount
(see Note 16)
Advance to the
Company (see Note 14)
Shares allotted for
equity raised (see
below and Note 16)
Rental of
accommodation for
staff, plus acquisition
of land for plant site
Balance of settlement
for waiver of profit-
share agreement (see
page 21)
-
A Lowrie
20
B Smit
-
A Bali
104
G Midende
125 M Eales
37
A Pouroulis
London office rental
1
B Smit
70
C Morelli
Consulting
disbursements owed
Exploration activity
(ground magnetic
survey in Burundi)
24
C Morelli
Exploration activity
501
X During the 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 (see note 16 for details).
X The US$122k due to Martin Eales at year end relates to the unsettled amount in respect of his waived entitlement to a
profit-share agreement under his previous contract (see page 21).
X Remuneration with key management personnel has been disclosed in note 6.
22. 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
Rainbow International Resources Ltd
Rare earth exploration
British Virgin Islands
Rainbow Rare Earths UK Ltd
Service Company
United Kingdom
Rainbow Burundi SPRL
Rare earth exploration
Republic of Burundi
Rainbow Mining Burundi SM
Rare earth exploration and mining
Republic of Burundi
% Share
Capital Held
% Share
Capital Held
2017
100%
100%
97%
90%
2016
100%
-
97%
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.
56
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 23. Contingent Liabilities
There were no contingent liabilities at 30 June 2017 (30 June 2016: nil).
24. Post Balance Sheet Events
There were no post balance sheet events.
25. Financial Risk Management
The Group’s financial liabilities at each period end consist of convertible loan notes, related party loans and trade and other
payables. All liabilities are measured at amortised cost. These are detailed in notes 14 and 15.
The Group has various financial assets, being other receivables and cash, which arise directly from its operations. All are
classified as loans and receivables. These are detailed in notes 12 and 13.
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 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
US dollars
GB pounds
Burundi Francs
Trade and other payables
South African Rand
GB pounds
Burundi Francs
Year Ended
30 June 2017
US$’000
Year Ended
30 June 2016
US$’000
1,250
1,937
11
3,198
56
9
5
70
Year Ended
30 June 2017
US$’000
Year Ended
30 June 2016
US$’000
5
320
42
367
3
287
12
302
57
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTSOVERVIEWRainbow Rare Earths Group Anual Report & Accounts 30 June 2017 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 monitor
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. Ultimate responsibility for liquidity
risk management rests with the Board of 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 1 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
Total borrowings (note 14)
Less: Cash and cash equivalents (note 13)
Net debt/(net cash)
Total equity
Ratio
26. Non Cash Transactions
Material non cash transactions were as follows:
Year end 30 June 2016
30 June 2017
30 June 2016
US$’000
US$’000
20
(3,198)
(3,178)
8,744
-36%
1,655
(70)
1,585
1,480
107%
X The difference between cash additions to exploration and evaluation costs and note 10, representing movements in
capital accruals
X Finance costs as detailed in note 5 including the loss on extinguishment of the convertible loan note
Year end 30 June 2017
X The difference between cash additions to exploration and evaluation costs and note 10, representing movements in
capital accruals
X The difference between cash additions to property, plant and equipment and note 11, representing movements in capital
accruals
X Finance costs and the finance income as detailed in note 5
X Share based payments, which have been recognised in income statement
X Shares issued in settlement of liabilities, shares issued for commissions and early settlement discounts per note 16.
27. Ultimate Controlling Party
The Company does not have a single controlling party.
58
Rainbow Rare Earths Group Anual Report & Accounts 30 June 2017 Rainbow Rare Earths Group
Anual Report & Accounts 30 June 2017
DIRECTORS AND ADVISERS
Executive director
Registrars and transfer office
Martin Eales - Chief Executive Officer
Computershare Investor Services PLC
PO Box 82, The Pavilions, Bridgwater Road
Non-executive directors
Adonis Pouroulis - Chairman
Alex Lowrie
Shawn McCormick
Atul Bali
Robert Sinclair
Bristol BS99 7NH
Bankers
Barclays Bank PLC
Finbank Burundi
Joint Brokers
Company Secretary
Artemis Secretaries Limited
Hannam & Partners (Advisory) LLP
Arden Partners Plc
Registered office
Independent Auditors
Trafalgar Court, Second Floor, East Wing,
BDO LLP
Admiral Park, St Peter Port, Guernsey GY1 3EL
Solicitors
Memery Crystal LLP (UK)
Legal Solutions Chambers (Burundi)
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59
Rainbow Rare Earths Limited
Head office
29 Lincoln’s Inn Fields
London
WC2A 3EG
Registered office
Trafalgar Court
Admiral Park
St Peter Port
Guernsey
GY1 3EL
Tel +44 (0) 20 3910 4550
www.rainbowrareearths.com
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