A potentially huge catalyst is coming in the next couple of months for Rainbow Rare Earths (RBW:AIM) which could see a significant uplift in the company’s valuation.

For investors prepared to take the risk this could offer significant rewards, although this is only a trade to make with money you can afford to lose.

Demand is growing for rare earth elements which are used in applications including electric vehicles, smartphones and wind turbines. China currently dominates the production of refined metal with a rough 85% share.

Rainbow is developing the Phalaborwa project in South Africa which encompasses two waste stacks of gypsum, created by historic phosphate hard rock mining, from which it extracts the ore containing the rare earths.

On 15 May the company announced the completion of a £7.5 million equity fundraise which will fund a pilot plant to demonstrate it can produce rare earths to the required specifications for sale.

This process is more environmentally friendly than the solvent-based extraction used in other rare earth developments. While Rainbow will handle the front-end part of the process, the back-end processing will handled by Florida-based K-Technologies.

Confirmation it can deliver rare earths at the required specifications, which could be delivered as soon as July or August, would remove one of the key remaining uncertainties around the commercial viability of the project which has an estimated post-tax net present value of more than $600 million.

The project should have low operating costs because, thanks to the nature of the waste material the company is processing, the necessary ‘chemical cracking’ to derive the rare earth materials has already taken place.

Chief executive George Bennett explains to Shares that, as well as covering the pilot plant, the money raised should take the company all the way to the publication of a defined feasibility study at the end of the final quarter of 2024 – another key milestone.

A big chunk of the recent share placing was accounted for by TechMet, a privately-owned industrials group focused on securing the supply of key metals required for the energy transition and backed by the state-run US International Development Finance Corporation.

Bennett says the relationship with TechMet could help identify other projects where there is potential to derive rare earths from waste materials and that the company plans to patent its process.

The company recently agreed an MOU (memorandum of understanding) over a potential project with Moroccan state-owned phosphate producer OCP.

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