Notes to the Condensed Financial Statements

For the six months ended 31 December 2024

1.    General information

Rainbow Rare Earths Limited (the "Company" or "Rainbow", together with its subsidiaries the "Group"), is a company limited by shares registered in Guernsey, incorporated on 5 August 2011 with company registration number 53831.  The Company's registered office is Connaught House, St Julian's Avenue, St Peter Port, Guernsey.  The nature of the Group's operations and its principal activities are set out in the CEO and Financial Reviews.

The financial information for the period ended 31 December 2024 does not constitute the audited statutory accounts but the comparative information has been extracted from those accounts.  The report of the auditors on those accounts was unqualified.

This Interim Report has not been audited or reviewed.

A copy of this Half Yearly Report has been published and may be found on the Company's website at www.rainbowrareearths.com

2.    Basis of preparation

These condensed consolidated interim financial statements for the 6 months ended 31 December 2024 have been prepared in accordance with IAS 34 'Interim Financial Reporting'. They do not include disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the 2024 Annual Report and Accounts.

The same accounting policies and methods of computation are followed in the condensed interim financial statements as were followed in the most recent annual financial statements of the Group, which were published on 23 October 2024.  There are no newly effective IFRS Standards which have had an impact on the financial statements.

(a) Going concern

The Directors have continued to use the going concern basis in preparing these condensed financial statements.  The Group's business activities, together with the factors likely to affect future development, performance and position are set out in the CEO Statement.  The financial position of the Group, its cash flow and liquidity position are described in the Financial Review.

Following the completion of the US$8.5 million royalty financing and associated US$1.5 million share placing in July 2024 the Group's cash balance at 31 December 2024 was US$6.1 million (30 June 2024: US$0.1 million).  The Board has reviewed the Group's latest cash flow forecasts for the period to 30 June 2026, including reasonably possible downside scenarios. This has included the following assumptions:

·      Forecast expenditure of US$3.7 million for ongoing general and administrative costs of the Group over the 18-month period from 1 January 2024 to 30 June 2026, based on the current administrative cost base.  The reasonably possible downside scenario includes a 10% contingency for unexpected costs.

·      Estimated funding requirements of US$4.1 million for Phalaborwa.  This includes US$0.5 million to complete processing test work at the laboratory set-up at the Mintek facilities in Johannesburg, US$1.7 million to finalise the DFS, US$0.5 million for work streams relating to environmental permitting and site ownership issues, and US$1.2 million for Rainbow's technical team and associated costs.  Due to the nature of the work, actual costs and the timing of expenditure may differ to estimates.  The forecast includes a 10% contingency for increased technical costs associated with the test work, DFS and permitting workstreams.  The reasonably possible downside scenario adds a further 10% contingency for all Phalaborwa expenditure.

·      A continuation of care and maintenance for the Group's Gakara project in Burundi at a total cost of US$0.6 million for the 18-month period from 1 January 2025 to 30 June 2026, based on the current administrative cost base. The reasonably possible downside scenario includes a 10% contingency for unexpected costs.

·      Business development costs totalling US$0.2 million expected to cover initial test work and study phases at the Uberaba project in Brazil and the Group's other development projects.  Management's reasonably plausible downside scenario allows an additional US$0.5 million for business development

Based on management's reasonably plausible downside scenario outlined above, the Group will need to raise additional finance of at least US$3.9 million before 30 June 2026, along with any further funds required to progress the Uberaba opportunity in Brazil. The timing of the required fundraising is dependent on the timing of discretionary expenditure on the Phalaborwa project and the Group's development pipeline, including the Uberaba Project in Brazil, which is within management's control. Based on the robust economic prospects for the Phalaborwa project, the Board is confident that additional funding will be secured as required.  However, the Board accepts that these circumstances indicate the existence of a material uncertainty which may cast significant doubt over the Group's ability to continue as a going concern and therefore it may be unable to realise its assets and discharge its liabilities in the normal course of business.  The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

(b) Dividend

The Directors do not recommend the payment of a dividend for the period (six months ended 31 December 2024: US$Nil, six months ended 31 December 2023: US$Nil).

(c) Principal Risks and uncertainties

There are a number of potential risks and uncertainties inherent in the mining and metals sector which could have a material impact on the long-term performance of the Company, and which could cause the actual results to differ materially from expected and historical results.  The Company has taken reasonable steps to mitigate these where possible. Full details are disclosed on pages 44-47 of the Annual Report for the year ended 30 June 2024.  The risks and uncertainties are summarised below:

·      Phalaborwa project definition risk (High business impact):

-      The Interim Study published in December 2024 confirmed a processing flowsheet capable of economically extracting the magnet rare earth metals from the gypsum stacks in a low capital and low operating cost environment. The Interim Study was based on the results of pilot testing of the rare earth leaching and recovery circuit which successfully produced a mixed rare earth carbonate product in South Africa. The Interim Study incorporated substantial changes to the original proposed flow sheet set out in the Preliminary Economic Assessment published in September 2022. Further changes to the process flow sheet may be required as a result of ongoing test work being undertaken in South Africa, which could have a detrimental impact on the economics of the project as set out in the Interim Study.

-      Additional work on purifying and separating the rare earths from the concentrated mixed rare earth output from the leaching circuit is required to confirm the efficacy of the separation elements of the proposed processing flowsheet. This work is being undertaken under the direction of the Rainbow team in a dedicated laboratory facility in South Africa. In the event that the separation test work is not successful a mixed rare earth product will have a lower payability than separated rare earth oxides, which will have a detrimental impact on the economics of the project as set out in the Interim Study.

-      Following completion of the test work on both the leaching and separation circuits a DFS will need to be completed to provide sufficient confidence for project development, which may not deliver results in line with the Interim Study. The Group's technical team has designed and commissioned numerous commercial plants in Africa, including completion of feasibility studies for rare earth projects, and are therefore familiar with alternative technical options that may need to be deployed if the original strategies prove uneconomic.

-      The Ecora royalty rate calculated as 0.85% of gross revenue from commercial production increases to 0.95% if commercial production is reached after 30 September 2027 and 1.10% if commercial production is reached after 30 June 2028. A delay in completion of the DFS, or extended delays between completing the DFS and project development, would increase the cost of servicing the Ecora Royalty.

·      Permitting risk (High business impact):

-      New and updated permits and licences will be required to develop the Phalaborwa project including, but not limited to, a water use licence, waste management licence and air emissions licence. Rainbow is working with specialist consultants to compile the technical reports required for the permitting process and is aiming to make the relevant applications in parallel with work on the DFS.

-      Whilst the timeframe for the issuance of permits is difficult to predict, the Phalaborwa project will clean up legacy environmental issues at the site, including treating the acid water currently associated with the unlined gypsum stacks and re-stacking the processed gypsum on new lined stacks designed in accordance with IFC Performance Standards and the Equator Principles. Accordingly, the Group is confident that the relevant permits will be issued to allow the project to proceed.

·      Financing risk (High business impact):

-      The Group's ability to continue to develop the Phalaborwa project and other new business opportunities will rely upon its continued ability to access financing, both at the corporate and project level.

-      The financing of Phalaborwa will be dependent on the outcome of the DFS, which will be impacted by a number of factors beyond the Company's control including but not limited to commodity prices, the outcome of processing test work including the ongoing programme of work for rare earth separation, the issue of relevant permits, and the ability to resolve site access and environmental matters set out separately below.

-      Management maintains strong relationships with key sources of finance. Rainbow has a history of securing funding required for the Group's growth plans, including support from its cornerstone investors, and management expects to be able to secure additional funding as required.

·      Rare earth prices (High business impact):

-      Rainbow is focused on the identification and development of secondary rare earth deposits that can be brought into production quicker and at a lower cost than traditional hard rock mining projects, with a focus on the permanent magnet REE neodymium and praseodymium, dysprosium and terbium.

-      Whilst analysts are predicting strong growth in demand for rare earths, prices have been volatile in the past and are currently at levels substantially below the base case set out in the Phalaborwa Interim Study. Whilst the Phalaborwa Interim Study confirmed a low-cost operation that has resilient economics in lower rare earth price environments, if the underlying rare earth basket price falls or remains at low prices for the long term, this reduces potential revenue that will impact the long-term profitability of the project and could impact the commercial viability of any development.

-      Rainbow intends to produce separated rare earth oxides at 99.5% purity for which pricing is available from independent sources. If the separation test work is not successful, Rainbow may need to sell a mixed rare earth product or rare earth oxides with lower purity, either of which will have lower payability than 99.5% pure separated rare earth oxides. Rainbow's engagement with potential purchasers of these products have not defined the ultimate payability, which will be dependent on the final specifications of the product sold.

·      Site access (Medium business impact):

-      The proposed site layout for Phalaborwa incorporates an area of land within the fenced area of the Bosveld industrial complex for which the surface rights are owned by the South Africa Department of Public Works and Infrastructure. A failure to obtain a lease to allow use of this land will require the proposed site layout to be amended, which could impact both the timing and cost of the proposed Phalaborwa development.

·      Environmental (Medium business impact):

-      The gypsum stacks that comprise the resource for the Phalaborwa project represent an environmental disturbance that requires remediation representing an environmental liability as described in the Phalaborwa PEA. On transfer of the gypsum stacks to the Phalaborwa operating company, the liability associated with the remediation of historic disturbance will not transfer to the Group. Under South African law the responsibility for a pre-existing decommissioning liability remains with the historic owners of the site on transfer to a new owner. In addition, Bosveld have provided Rainbow with a contractual indemnity against pre-existing environmental liabilities associated with the site. However, on transfer the Group will take on responsibility for the day to day management of the stacks, including the associated polluted water. Failure to manage the stacks in a responsible manner to prevent further pollution to the surrounding area could result in the Group being liable for any resulting liabilities. Events outside Rainbow's control could impact the cost of managing the stacks in a responsible manner, which could have an adverse impact on the overall cost base of the Group.

·      Co-development risk (Medium business impact):

-      The Group's assets include projects that will be conducted in joint arrangements or with associates, which reduces the Group's ability to control and manage risk and places reliance on partners not controlled by the Group.

-      At Phalaborwa, Bosveld has a 15% interest in the project and, as current owner of the site, their assistance is required to ensure the assets necessary for the project development are transferred at the necessary time into the joint venture vehicle. Rainbow has the option to acquire the 15% minority interest from Bosveld by issuing 38,873,663 new ordinary shares at any time up to 31 December 2025, and Bosveld has a right to sell its 15% stake under the same terms subject to the transfer of the assets for the project having been completed. In the event that the Group has not finalised all issues relating to the transfer of the assets prior to 31 December 2025, including the site access risk noted, Rainbow may need to negotiate an extension to this long-stop date.

-      The Group's development pipeline, including but not limited to the Uberaba property in Brazil and the opportunity with OCP in Morocco, are at a much earlier stage of development. The legal framework for the development of a commercial operation for these opportunities has not been fully defined and terms may not be agreed with the owners of these assets to allow a development to occur.

·      Country and Political (Medium business impact):

-      Rainbow's development projects are located in South Africa, Brazil and Burundi. Emerging market economies are generally subject to greater risks, including legal, regulatory, tax, economic and political risks, and these risks are potentially subject to rapid change.

-      On 12 April 2021, the Government of Burundi suspended the export of concentrate produced at Gakara. This was followed on 29 June 2021 with a suspension of all mining and exploration activity. All operations remain on care and maintenance. Management assesses that the actions of the Government of Burundi, which have not been in accordance with the legally binding mining convention in place, create a situation where the re-start of operations in the near term cannot be reasonably assumed. With the exception of cash and VAT recoverable the assets of the Gakara cash generating unit have been impaired to nil. The VAT recoverable is not considered to be impaired as it is directly related to a recognised liability for VAT payable and, whilst there is no legal right to net settlement, it is expected that the liability will only be settled in a negotiated off-set against the recoverable asset.

3.    Segmental information

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 the Group has two reportable segments:

·      Phalaborwa - a gypsum stack re-treatment project for the recovery of rare earths in South Africa.

·      Gakara - a rare-earth project in Burundi.

Unallocated costs include corporate costs, which are not reported by entity to the Board.

Six months ended 31 December 2024:

Six months ended 31 December 2023:

4.    Loss per ordinary share

Loss per ordinary share is calculated by dividing the net loss for the period attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period.

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.

The calculation of the basic loss per share is based on the following data:

5.    Exploration and evaluation assets

Only costs relating to the Phalaborwa project were capitalised during the Period. The Phalaborwa project represents an opportunity to extract rare earth elements from the chemical re-treatment of gypsum stacks in which a rare earth resource has been defined. Therefore the costs of establishing the commercial viability of development for the project are being capitalised as exploration and evaluation assets under IFRS 6. Additions in the Period include costs relating to the development of the Interim Study, environmental permitting, test work costs including establishing a laboratory in South Africa to manage the test work programme for both the leaching circuit and separation circuit, and costs of the core team managing the Phalaborwa technical workstreams.

The Gakara project has been under care and maintenance throughout the Period and, accordingly, none of the costs meet the requirements under the Group's accounting policy for capitalisation.  All capitalised exploration and evaluation costs associated with Gakara were impaired in the year ended 30 June 2023. FinBank SA hold security over the fixed and floating assets of Rainbow Mining Burundi SM ("RMB") which include the impaired exploration and evaluation assets associated with the Gakara mining permit in Burundi.

6.    Property, plant and equipment

All property, plant and equipment associated with the Gakara project were impaired in the year ended 30 June 2023. FinBank SA hold security over the fixed and floating assets of RMB which include the impaired property, plant, and equipment in Burundi.

Costs capitalised in the Period relate to the laboratory facility set up in Johannesburg to manage the test work for the Phalaborwa project which is expected to be used for the longer term on testing for other projects in the business development pipeline.

7.    Trade and other payables

The Directors consider the carrying value of trade and other payables approximate to their fair value.

8.    Borrowings

FinBank Loan

The FinBank loan facility in Burundi is expressed in Burundian Franc ("BIF") and carries an interest rate of 15%.  The loan principal plus interest is being paid at a rate of BIF30 million per month until April 2027 on a reducing balance basis.  Under the terms of this loan, FinBank has security over the fixed and floating assets of RMB, the shares of RMB, and the cash held in RMB's FinBank bank accounts.  Interest on the loan amounted to US$19k (2022: US$26k).

Warrant Liability

On 21 February 2020, 2,000,000 warrants with an exercise price of 4.55 pence per warrant were issued to Pipestone Capital Inc, in which George Bennett, the Company's CEO, has a beneficial interest.  The warrants were issued in lieu of interest on a US$1 million bridging loan provided to the Company, which was repaid in full in December 2021.  The Pipestone warrants are recognised as a financial liability at fair value through profit and loss with changes in value included in finance income. The warrants are exercisable at any time until 20 February 2026.

9.    Royalty Liability

On 1 July 2024 the Group entered into a royalty funding agreement with Ecora Resources PLC ("Ecora") securing gross proceeds of US$8.5 million in exchange for a royalty payable on all future sales from the Phalaborwa Project in South Africa. The royalty rate of 0.85% increases to 0.95% if commercial production is reached after 30 September 2027 and 1.10% if commercial production is reached after 30 June 2028.

The royalty is recognised as a financial liability at fair value through profit and loss. At initial recognition the royalty liability was measured at fair value of US$8.5 million. In determining the fair value management considered the expected timing and volume of rare earth and other products to be sold by the Phalaborwa Project, forecast prices for rare earth oxides and other products, and the cost of capital of the Company using a risk-free rate and expected credit spread rate. Having considered changes in rare earth price forecasts and discount rates, with all other factors held constant as there had been no change in the expected project sales volumes or timing thereof, the Directors valued the liability at US$8.435 million at 31 December 2024. The change reflects an update to the discount rate used as a result of the estimated cost of capital of the Company. Changes in fair value are included in financing costs. All costs associated with the royalty transaction are included in finance costs.

10.  Share capital

The table below shows a reconciliation of share capital movements:

In July 2024 the Company issued 10,442,427 new ordinary shares of no par value to Ecora Resources plc at a price of 11.3652p to raise gross cash proceeds of US$1.5 million.

On 6 September 2024 the Company issued 2,120,967 new ordinary shares of no par value to Directors and management pursuant to the Company's Short Term and Long Term Incentive Plans as follows:

·      Short term incentive plan: 1,697,852 shares were issued to George Bennett, CEO, and 897,883 shares were issued to Pete Gardner, CFO, at a fair value of 10 pence per share, representing bonuses awarded in the year ended 30 June 2024.

·      Long term incentive plan: 333,332 shares were issued to Non-Executive Directors as a replacement of options that had been due to vest on 19 May 2024 which had been cancelled to comply with s.409A of the United States Internal Revenue Code.

During the prior year:

·      On 26 September 2023, the Company agreed conditionally to issue 30 million new ordinary shares of no par value at a price of 15 pence per share, raising gross cash proceeds of US$5.5 million.  An initial tranche of shares was issued on 5 October 2023 with the balance issued on 6 December 2023 following shareholder approval at the Company's Annual General Meeting held on 21 November 2023.

·      In December 2023 the Company issued 1,458,000 new ordinary shares of no par value pursuant to the exercise of nil priced share options by George Bennett, CEO.

11.  Related party transactions

The above table does not include remuneration of Directors and senior management.

1.     MPD Consulting Limited, in which Pete Gardner, the Company's CFO, has a beneficial interest, has recharged certain costs relating to UK support incurred on behalf of the Group.

2.     Magna Capital (Guernsey) Limited ("Magna"), in which Adonis Pouroulis, the non-executive Chairman of the Board of Directors, has a beneficial interest, was engaged in December 2022 to assist the Company with its strategy to consolidate ownership of the Phalaborwa project and lift the notarial bonds in South Africa issued in favour of third parties which may have impacted the ability of Bosveld to transfer the rights to the Phalaborwa project to a new entity as envisaged. The transaction was concluded in July 2023 and a success fee of £500k was paid to Magna.

12.  Post balance sheet events

No events after the reporting date were identified that would affect the group of companies significantly or cause its financial results to be materially misstated.