Berenberg lowers target price on Rainbow Rare Earths following TechMet deal

Rainbow Rare Earths announced on Wednesday that it has entered into an option agreement with major shareholder TechMet, backed by the US International Development Finance Corporation, whereby TechMet has the right to invest $50.0m for a 15-33% direct equity stake in its Phalaborwa rare earth project in South Africa. This would underpin a valuation of the project's equity at $151.5m-333.3m at the option price.

TechMet also has a put option, granting it the right to exchange the direct project stake for shares in Rainbow at "the fair market value of the underlying Phalaborwa stake" for a period of two years from the commercial completion of the Phalaborwa project, or at any time in the event of a change of control of Rainbow.

"In our view, this is a major de-risking event from a funding perspective and will act as a positive in the eventual construction funding of Phalaborwa. We had previously modelled a final $100.0m equity raise as part of the project construction fundraise, and clearly this will reduce with the TechMet option. Given an NPV in the preliminary economic assessment of $627.0m, we expect a TechMet stake of 15%. Ultimately, this removes some funding overhang for the project's construction cost, and we think will act as a positive for debt lenders also, given that a well-backed investor is willing to invest $50.0m into the project," said Berenberg.

The German bank made some adjustments to its model to incorporate Rainbow's recently released full-year results and to adjust for recent price deck and foreign currency changes, which had a negative impact on its Sterling valuation. Overall, these changes adjust its price target to where it still offers a 140% risk upside. Berenberg also stood by its 'buy' rating on the stock.

Reporting by Iain Gilbert at Sharecast.com