Rainbow Rare Earths Ltd

Rainbow Rare Earths Ltd (LON: RBW) is s Guernsey-based mining Company, which is involved in the exploration and development of the Gakara project in east Africa and the Phalaborwa Project in South Africa.

Rationale for Valuation - Avoid at GBX 20.24

• The Company’s EV to EBITDA, Price to Earnings and Price to Cash Flow metrics are in the negative zone as compared to the industry multiples.
• The top-line performance has declined, and the profitability margins remained in the negative zone for the period.
• The Company is dependent upon funding through external sources to run its business operations.
• In the short-term, the UK market is likely to remain under pressure due to increased market volatility.
• From the technical standpoint, 14-day RSI stood at around 71.54 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• The lack of exploration and appraisal success can lead to failure of the balanced business model.
• Moreover, insufficient capital to pursue business opportunities and manage operations can create funding issues.
• Also, the lack of adherence to safety, environment, and health policies can lead to regulatory penalties and clean-up costs.

Recent News

On 12 February 2021, the Company announced the first batch of assay results from the Phalaborwa Rare Earths Project, which confirmed the mineralisation's high-grade nature. It also confirmed the average in situ grade of 0.50% total rare earths oxide and the average in-situ combined grade of 0.15% Neodymium and Praseodymium oxide.

On 3 February 2021, the Company provided an exploration update from the Gakara rare earths project, with positive exploration results. Further, it has a significant potential of 10,000 - 20,000 tonnes per annum concentrate producing operation.

Financial Highlights (for the year ended 30 June 2020 (FY20), as on 28 October 2020)

• In FY20, the Company's operations were impacted by the effects of the Covid-19 pandemic.
• For FY20, the revenue from contracts with customers declined to USD 422 thousand (FY19: USD 1,541 thousand).
• The LBT (loss before tax) has improved from USD 12,146 thousand to USD 2,225 thousand.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The Company is not able to estimate its results of operations, financial condition, or liquidity for FY21, due to the evolution of the Covid-19 outbreak. As lockdown eased, the trading performance continued to improve and put the Company in a better position to handle the COVID-19 uncertainty. However, the external environment remained challenging. Further, it operates in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. The Company is going through a transformation phase and investing more towards the quality of service at this crucial time. Meanwhile, the Company’s profitability margins remained in the negative zone. The stock made a 52-week low and high of GBX 1.35 and GBX 21.50, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on Rainbow Rare Earths Ltd at the current price of GBX 20.24 (as on 19 February 2021, before the market close at 11:04 GMT).

Mkango Resources Ltd

Mkango Resources Ltd (LON: MKA) is an AIM-listed rare earth element Company, which is also associated with minerals exploration and development.

Rationale for Valuation - Expensive at GBX 18.98

• The Company has not reported the revenue from the last four years, which raises uncertainty regarding its earning potential.
• The Company’s profitability margins and Return on equity remained in the negative zone from the last four years.
• The Company’s EV/EBITDA, Price/Earnings and Price/Cash Flow multiples are in the negative zone.
• The stock has underperformed the index (FTSE AIM All-Share) during the last month and delivered a negative return of approximately 2% in the last month.
• From the technical standpoint, 14-day RSI stood at ~63.21, which means the stock price could decline in the short term.

Key Risks

• The volatility in the commodity prices and uncertainty in demand can affect the business of Mkango Resources.
• Any disruption in the operations and production caused due to macroeconomic or political events can affect the business.
• The Company is exposed to financial risk, which includes lack of liquidity, weakness in the balance sheet, large tax payments and improper financial reporting.

Recent News

On 8 February 2021, the Company has issued 325,000 shares to Bacchus Capital Advisors Limited, which issued at a deemed price per share of C$0.27.

Q3 FY20 Update (for the three months ended 30 September 2020, as on 27 November 2020)

• The loss for Q3 FY20 declined to USD 793,393 as compared with the corresponding period of the last year, while the loss for the nine months of 2020 was USD 3,229,848.
• On 30 September 2020, the Company had cash of USD 5,780,211, which decreased from the previous period (30 June 2020: USD 6,440,697).
• Mineral project expenses for the third quarter of 2020 surged by USD 619,926 as work on the Feasibility Study progressed.
• The Company saw a reduction in foreign exchange losses of USD 344,469.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The Company is in the development stage and do not generate any revenue for the period. The profitability margins have remained stagnant or declined. The Company’s operational performance was challenged by the Covid-19 outbreak and the collapse in rare earth metals.  The Company remains exposed to low prices for the products. MKA’s business is exposed to economic and market fluctuations, which may adversely affect the Company’s business and financial performance. However, it has taken actions to mitigate any impact of COVID-19 on operations. The Company has also adopted several cost-cutting measures (until the crisis gets subside). The Group is presently trading near the 52-week high, raising doubts at the upside potential at the current price level. The stock made a 52-week low and high of GBX 2.20 and GBX 21.00, respectively.

Based on the current market dynamics and factors as discussed above, we believe that the Mkango Resources Ltd stock is looking “Expensive” at the current price of GBX 18.98 (as on 19 February 2021, before the market close at 10:59 AM GMT).

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