Ecora Resources PLC (LSE:ECOR, TSX:ECOR, OTCQX:ECRAF) royalty and equity investment in Rainbow Rare Earths looks like a sensible and attractive move says Berenebrg, which calculates that for the US$8.5 million cost, the NPV is US$13 million and rate of return around 11%.
Berenberg adds that Ecora "has the financial flexibility to complete the deal, and we think this is opportunistic and accretive, but the market will, we think, continue to focus on the near-term revenue profile".
Projects such as BHP’s West Musgrave project in Australia and Capstone Copper’s Santo Domingo project in Chile are a part of this profile, adds the broker.
“This project adds to that pipeline, rather than adds immediate revenue, but we think that this will be a quality addition to the portfolio, with scope for near-term revenues and upside if the project is delayed.
“On our base-case estimates, we think the royalty can deliver annual revenues of around US$2.2 million to Ecora, or US$1 million at spot prices, which we think are at cyclically low points of the rare earths cycle.
"The market may well not give Ecora full credit for this deal yet, as it focuses on the balance sheet and medium-term royalty production timeframe, but for patient investors, we think the value of this deal will become clear in time."
For Rainbow, the deal materially reduces dilution risk for shareholders," says Berenberg.
“We had expected one penultimate equity raise to fund the progression of a definitive feasibility study (DFS) for Phalaborwa, but this has been avoided.
“Rainbow has stated in its announcement that the US$10 million raised will fund the company to complete its DFS and provide funding to June 2025, by which point we expect a final investment decision (FID) for the project.”
“On the release of a DFS, we expect a final equity raise of US%50m to fund the project, with the balance of equity coming from the US DFC (US$50 million, through TechMet) and US$200 million of debt.
"Such is the quality of the Phalaborwa project, we calculate that life of project EBITDA margins are 74% post-royalty (75% pre-royalty).
“In our view, this transaction is a very positive step which enables Rainbow to progress Phalaborwa to FID with a supportive partner while avoiding equity dilution, paving the way for the commencement of operations in 2027."
Target prices are 140p for Ecora and 38p for Rainbow.