Frontier Rare Earths is an exploration and development company principally focused on projects in Africa. Its flagship asset is the Zandkopsdrift rare earth deposit located in the Northern Cape Province of South Africa and is one of the largest, code compliant rare earth deposits under development worldwide.
Frontier Rare Earths "severely undervalued" stock, stands out from peers, says CFO
Frontier Rare Earths (TSE:FRO) has been buying up shares of its stock in the past few weeks, acquiring 15,000 shares this month alone, as management and insiders of the company believe the rare earths explorer is "severely undervalued".
The share buybacks are part of a normal course issuer bid authorized in June of last year, which allowed the company to acquire up to 1 million shares over the course of 12 months.
So far, the Canadian company has acquired more than 700,000 shares. Frontier has 89.5 million shares in issue, with a current market cap of $67 million.
It has cash of $51 million, meaning the market is suggesting that its Zandkopsdrift rare earth element (REE) project in South Africa is worth some $16 million.
"While the total of 1 million shares may seem modest at a little over 1% of the shares in issue, it represents approximately 5.5% of the free float (which is c.21% of the shares in issue)," CFO Paul McGuinness told Proactive Investors in emailed comments.
"It should also be noted that no insider to the company has sold a single share in the company since the IPO."
McGuinness suggests that it should be clear from this that management and insiders believe Frontier to be "severely undervalued" and are prepared to act on that conviction.
He also notes that unlike many of its peers whose shareholders have and will continue to experience dilution of their interests as a result of fundraisings, Frontier has sufficient funds to complete its definitive feasibility study for Zandkopsdrift.
"Frontier's shareholders therefore are and will continue to see their interest in the company increase over the course of the normal course issuer bid," he said.
The company's shares have picked up recently, up more than 40% in the last three months, as investors are more and more anticipating the value creation from its project in South Africa, with a preliminary feasibility study expected out this quarter.
In December, the company said that Korea Resources Corp (Kores) - the state-owned mining and natural resource investor - offically acquired the initial 10 per cent stake in Zandkopsdrift.
Along with the 10 per cent interest, Kores has also acquired an off-take right and obligation for 10 per cent of Zandkopsdrift rare earth production, for a total cash payment of C$23.8 million. The acquisition is part of a strategic alliance agreement initially signed between the two parties in December 2011, with an expanded deal announced in late October last year.
Under the expanded deal, Kores has the option to increase its interest in the project to up to 50 per cent, becoming an equal partner with Frontier, with an off-take right and obligation for up to 50 per cent production from Zandkopsdrift.
Frontier said the acquisition makes it the only junior company in the rare earths sector to have signed and completed a definitive agreement with a significant strategic partner.
The Korean company is also to arrange project financing for the entire development and must committ to provide its pro rata share of funding for the portion of costs not covered by the project financing.
A preliminary economic study on the project, released last February, showed that Zandkopsdrift is estimated to contain roughly 950,000 tonnes of total rare earth oxide (TREO), applying a one per cent TREO cut-off, and gave a whopping net present value of $3.65 billion, after tax and royalties, at an 11 per cent discount rate.
Internal rate of return for the project was seen at 52.5%, after tax and royalties, with a two year payback from start of production.
Average production was pegged at 20,000 tonnes of separated rare earth oxides per year over a 20-year mine life, with production due to start in the second half of 2015.
Shares of the rare earths explorer are currently changing hands at around 72 cents in Toronto.