Spurred by the highly positive fundamentals in the rare earths market, Frontier Rare Earths is one of the few companies outside China with a significant rare earth project at an advanced stage of development. Frontier’s large, high grade Zandkopsdrift deposit, which is hosted on an outcropping hill in a low cost and mining friendly region of South Africa, could prove to be relatively straightforward, low cost and quick to bring in to production.
Last month two equity research reports about the Company were issued, each with price targets significantly above Frontier's current trading price of C$3.00. Byron Capital rated the company a buy with a target share price of C$4.80, while CIBC initiated coverage on the Company with a sector outperform – speculative rating and a 12-month target price of C$7.30. The reports were bullish, both specifically about the potential of Zandkopsdrift, and more generally about the outlook for rare earths. (Reasons underlying the positive fundamentals in the market were discussed in a recent Proactiveinvestors article: Rare Earth Metals: The Seventeen Metals Crunch).
Here Proactiveinvestors talks with James Kenny, the CEO of Frontier, about his views on the past, present and future of the Company and on why he feels that the Zandkopsdrift project has the potential to be world class.
1. Can we start with some history? How and why was Frontier formed? And how did you acquire the Zandkopsdrift project?
The key management and promoter team in Frontier first became involved in South Africa in 1994. We were attracted to the country by its abundant natural resources and potential; at this point – just after the end of the apartheid era and the beginning of democracy in South Africa - there was no significant junior mining industry in the country. The first venture which we formed in 1994 was Firestone Diamonds plc, which, among other things, went on to develop, build and run several alluvial diamond mines in Namaqualand in South Africa, (and is now operating two kimberlite diamond mines in Botswana and Lesotho).
Frontier was formed in 2002, with the initial plan of developing a portfolio of non-diamond exploration assets in Southern Africa. In 2005, when the Company became more commercially active we decided to focus our efforts and capital on areas where we saw a compelling business opportunity and where we thought the Namaqualand region of the Northern Cape Province was prospective. Namaqualand is an area with a 150 year long history of mining and where the Frontier team have decades of exploration and mine development experience We also decided - and this was well ahead of the curve - to target the rare earth sector due to the positive supply/demand outlook for the sector where we anticipated rapidly increasing demand but supply side constraints.
Our research led us to identify the Zandkopsdrift Project area which at that time was open ground, (though like many parts of South Africa it had been previously explored over several decades). We staked just under 60,000 hectares and secured the prospecting rights from the South African government subject to a minimum exploration expenditure requirement over 5 years which we achieved in the first year.
We did extensive work on the project area and In the course of our exploration work, having narrowed down our area of interest to focus on the 120 hectare Zandkopsdrift carbonatite complex, we came across evidence of previous exploration workings of unknown provenance. It was subsequently established by us that Anglo- American had previously explored the Zandkopsdrift area for its rare earth potential in the mid-1980s and had undertaken a considerable amount of work comprising some 3,500 metres of drilling, 2,000 assays, and some metallurgical test work had been undertaken. This work had been properly archived by Anglo American and was subsequently acquired by Frontier.
The acquisition of Anglo data (pulps, cores, assays, met test work results, reports etc.) has since been fully validated and has definitely saved Frontier several years work and many millions of dollars in exploration spending. The validated data has been amalgamated with further results from Frontier’s own exploration program culminating with the publication of the maiden NI43-101 compliant resource for the Zandkopsdrift project in October 2010 just ahead of our IPO on the Toronto Stock Exchange last November.
The resource estimate for the Zandkopsdrift deposit currently stands at a total of approximately 950,000 tonnes TREO (total rare earth oxide) with approximately 60% of the resource (532,000 tonnes) in the indicated category. Zandkopsdrift is now recognised as one of the largest known rare earth deposits outside China classified under international reporting standards. With Frontier planning to produce 20,000 tonnes of separated rare earth oxides per annum, the current resource is already expected to be sufficient to support a mine life of 30-35 years or more. Furthermore, as the deposit is still open laterally and at depth there appears to be significant scope for resource expansion.
To put these figures into context Lynas, which owns the Mount Weld rare earth deposit in Australia which is scheduled to commence production by the end of 2011, will process 11,000 tpa in Phase 1 rising to 22,000 tpa in Phase 2 which will be the largest scale of production from any of the new non-Chinese rare earth mines.
2. Besides its size what else is particularly noteworthy for investors about the geology of Zandkopsdrift?
Rare earths, as you probably know, are neither rare nor earth. What is rare, however, is to find them in viable concentrations in accessible and mining friendly places where they can be developed quickly and economically.
Zandkopsdrift is noteworthy for a number of reasons besides the size of the carbonatite complex including its location from surface, its high grade, the supergene enrichment which has endowed the deposit with a number of higher grade zones within the overall resource shell, its relatively conventional mineralogy where the majority of the mineralisation is contained in monazite, the attractive distribution of rare earths elements, its low level of radioactivity and its further potential for resource expansion.
To explain further - the resource at Zandkopsdrift is hosted in a carbonatite setting which is exposed as an outcropping hill rising approximately 50 metres above the surrounding plain. The mineralisation at Zandkopsdrift starts at the surface - there will be a zero strip ratio - and has currently been defined in the resource to a depth of approximately 80 metres although several holes have terminated in mineralisation.
The red line demarcates the 50 metre hill which hosts the ZC1 carbonatite at Zandkopsdrift
The Zandkopsdrift deposit has been deeply weathered in certain areas – a process known as supergene enrichment -which has resulted in the formation of a number of distinct ore zones with a significantly higher grade of economic minerals. While the resource overall has an average grade of 2.2%, the grade for the Zandkopsdrift B zone, for example, which has enough ore for first 12 – 15 years output at the planned production rate, is some 50% higher at more than 3.6%.
Zandkopsdrift Resource Estimate, October 2010: Total and Higher Grade Zones
The combination of size, grade of the deposit, and the favourable distribution of the rare earth elements, with a skew to the more valuable elements, means that the in situ value of the deposit is high – the C zone at Zandkopsdrift has the third highest in situ revenue per tonne in the world outside of China.
Of course while the in situ value is an important factor, the ability to economically extract the metals is critical, especially as rare earths are found in up to 200 host minerals, the very large majority of which have no known established commercial extraction process. Fortunately the rare earth content at Zandkopsdrift, like Mount Weld, is mostly hosted in monazite, for which there has been a demonstrated commercial extraction process for more than 30 years and which is one of the most common host minerals for rare earths.
Zandkopsdrift is noteworthy also for its low absolute and relative levels of thorium and uranium. Rare earths are typically found with uranium and thorium, but in this case the concentrations are relatively low [thorium at 225ppm and uranium at 65ppm]. This low level is advantageous as it reduces transport and disposal costs relative to other projects and reduces the potential environmental and permitting issues. Even if levels of thorium and uranium were higher this would be less of a problem than in other countries as uranium is mined and processed in South Africa, the country uses nuclear power and stores radioactive waste.
The fact that deposit is still open laterally and at depth is another positive feature, as is the fact that we have identified another 30 satellite pipes and plugs around the main Zandkopsdrift pipe. While we don't need any more tonnage to justify or support a commercial operation of global scale as the deposit is already large, these intrusions may offer pods of higher grade rare earths or more favourable distributions of the elements.
It is interesting to note the strong analogies between Zandkopsdrift and Mount Weld. Both are carbonatites which have undergone supergene enrichment and which host higher grade zones of mineralisation. Both have monazite as the primary rare earth host mineral. Both have low levels of thorium and uranium. Clearly though there is a very significant valuation differential between the two companies with Lynas, which is three to four years ahead of Frontier, capitalised at approximately $4.5B compared to Frontier's market capitalisation of $270M.
3. In the company's presentation you refer to the "Big 5" rare earths and also to neodymium equivalent grades. Could you explain these concepts and why they are relevant to Zandkopsdrift?
The fifteen rare earths are always found together but in varying distributions. Each metal of course has different characteristics, differing supply and demand curves and prices.
The market has tended to be overly fixated on heavy rare earths, [the elements with atomic numbers 63-72], and put in simple terms there is a perception that heavies are ‘good’ and lights are ‘bad’. However this is not the case. In fact, five of the ten heavy rare earths are very niche indeed with only very limited markets and no published prices. Looking at the basket of rare earths we believe that the key five elements (the ‘big five’) are praseodymium and neodymium, (both light rare earths) and, europium, terbium, and dysprosium, (which are all "heavies"). Using three year average prices we estimate that these five elements contribute more than 50% of rare earth project revenues to all the major projects outside China, except for Molycorp, and we believe are the five elements with the most attractive supply/demand and pricing dynamics. Zandkopsdrift has a good endowment of these, particularly in the high grade Zandkopsdrift B and C zones.
On a similar theme, it is common practice to express the grade of multi-commodity resources in terms of a metal equivalent grade by converting the grade of the minor commodities to a major one at a fixed set of prices (often historic averages). The normal practice is to pick a dominant metal in the deposit for the measure, though the comparative results would be the same whichever metal was used. Frontier has done this and applied the metric using neodymium equivalent grade under the guidance and recommendation of the Ontario Securities Commission. The resulting analysis provides a direct proxy for in situ value or revenue per tonne. Again Zandkopsdrift compares very favourably with most other major deposits worldwide with the C and B Zones ranking third and fourth respectively globally outside of China.
Of course the most crucial measure of all is the margin per tonne – the difference between the revenue and the cost per tonne. Zandkopsdrift is expected to have relatively low capex and opex thanks to its grade, zero/low strip ratio, conventional mineralogy and location in a low cost region with good mining and related infrastructure.
4. Please then could you tell us more about the location of the project. What is the current land-use? How close are you to power, water, transport links and settlements. What are the advantages to being located in this area?
Zandkopsdrift is located approximately 450 km north of Cape Town. The land is mostly used for very low intensity grazing and is not in an area of any particular environmental or other sensitivity. The project is connected by maintained gravel road to the tarred N7 which runs from Cape Town, past Zandkopsdrift, to Namibia. Zandkopsdrift is located approximately 30km from the nearest railhead at Bitterfontein which connects with the deepwater port of Saldanha Bay, approximately 260km to the south. The port handles the majority of South Africa’s iron ore exports.
Garries, the nearest town is 25km away, though there are several closer settlements. Labour is readily available locally following retrenchments from other mines. The airport is 140km north at Springbok, the regional capital of the Northern Cape Province.
The nearest high voltage (400kV) power line is currently 100km away. Water is available from seasonal rivers and local groundwater.
5. What exploration and development work has been undertaken to date on the deposit?
Zandkopsdrift has been explored intermittently for a number of commodities since the 1950s. The earliest programmes targeted manganese, phosphate and niobium while Anglo American's programme in the 1980s targeted rare earths.
As mentioned already Frontier acquired all Anglo's data and samples in 2008, including results from 3,400 metres drilled in 54 holes. We validated the data, conducted ground mapping, aeromagnetics, other geophysical and geochemical surveys and drilled a further 13 holes prior to publishing the maiden resource estimate in October 2010. To date this year we have drilled a further 3,000 metres in 54 holes as part of our 15,000 metre resource development drilling programme for 2011, and approximately 800 metres in 12 holes for metallurgical samples, recovering more than 6000 kg of material so far.
6. Metallurgy is always key in rare earth projects with a major impact on development time, capex and opex. What indications are there to date about the metallurgy of the orebody? What work has been undertaken and what recoveries do you anticipate?
Anglo and Johnson Matthey conducted the first metallurgical testwork on the ore in mid-1980s. Their studies were reviewed by SGS Mineral Services in 2010 who confirmed that more than 90% of the rare earths reported to solution when using hydrochloric acid at 200 degrees and concluded that the rare earth bearing minerals at Zandkopsdrift are likely to be amenable to conventional extractive processes.
At this stage it is probably fair to say that we are confident that we will have a full recovery flowsheet but that we will not know the specific parameters until the bench scale metallurgical test work is completed later this year.
7. Please tell us the ownership of Zandkopsdrift and about your Black Economic Empowerment Partners
As you know South Africa's Black Economic Empowerment strategy includes a requirement that mineral resource companies should be 26% owned by historically disadvantaged South Africans by 2014. Frontier has been fully BBE compliant for the last 4 years. The Zandkopsdrift project is 100% owned by Sedex Minerals (Pty.) Limited which in turn is 74% owned by Frontier and 26% by our BEE partners, including a 21% stake held by the Namaqualand Empowerment Trust (which comprises a number of local community stakeholders).
However Frontier is carrying the BEE partners until the BFS, funding their share of Sedex’ expenditure. In exchange the BEE partners are required to pay to Frontier 21% of the valuation following the Bankable Feasibility Study. Thus until that point Frontier effectively holds a 95% economic interest in the project.
8. Rare earth projects are generally more complex than other mining projects. What relevant experience is there in the Management team for developing a rare earths project in South Africa?
Rare earth projects are indeed complex – but the development at Zandkopsdrift can be likened more to a chemical engineering project than a mining project given the relatively straightforward nature of the deposit and likely mining parameters.
The management team includes seasoned explorers with considerable prior experience of the region, though like most other rare earth teams outside China we did not have extensive rare earth experience prior to acquiring Zandkopsdrift. However in the six years between prospecting and identifying the potential of Zandkopsdrift, undertaking extensive exploration and interpretative work and developing it to the point where it is recognised as one of the largest rare earth resources outside China we have grown a significant level of rare earth exploration and development skills in-house.
9. What is your timeline? What are your plans in the near, medium and long term?
We are in the midst of a 20,000 metre drilling programme which is designed partly as infill to improve the confidence of the estimates, partly as step-out to investigate the possible extension of the resource and partly to test the satellite pipes/intrusives. We have also, as part of this programme, recovered some six tonnes of metallurgical samples for testing by SGS.
The scoping study, which will examine the economics of the project and establish a flow-sheet, should be complete by end Q3 2011, with the pre-feasibility study following shortly afterwards in Q4 2011 or early Q1 2012. The full bankable feasibility study is scheduled for end-2012. All being well it should then take about 2 years' construction, so production should begin in early 2015.
The conceptual mining plan is to produce 20,000 tonnes of separated REO per annum with
mining, flotation and potentially a cracking plant on site at Zandkopsdrift, and a rare earth separation plant, possibly at Saldanha Bay. Saldanha Bay could be a good choice as it is already home to a steel works and ilmenite smelter and exports iron-ore from the deep-water port. A qualified work-force, power, water, support services and consumables are all available locally, and permitting is likely to be relatively straightforward
10. And how much cash is currently in the Treasury? How long do you anticipate this will last? Who are your shareholders currently? How will you fund construction?
We have no debt and about C$52M in the Treasury. This should take us comfortably through to the end of the Bankable Feasibility Study and may allow for some further discretionary exploration spending. About 65% of the shares are currently held by insiders, with the remainder split 20% retail and 80% between some 40 or more institutions. Geographically just over half our shareholder base is in Canada, approximately 30% in the US and the remainder from the UK and Europe,
We don't know as yet how construction will be funded but it may well be along the lines of Lynas' Mount Weld and Molycorp's Mountain Pass projects with a mix of equity finance and offtake/technical partnerships providing the balance.
11. Finally what are the milestones that investors should watch for in the coming year or two? Please also could you talk about key risks to the project as you see them and then summarise your view of the key advantages.
Of course we will continue to keep the market fully informed of developments. The biggest milestones over the next year or so will be the publication of the Preliminary Economic Assessment or scoping study in late Q3, the pre-feasibility by the end of 2011, and then the bankable feasibility study by end-2012. Our main aims for 2011 are to improve the confidence of the resource estimate, to expand the resources and to establish a flowsheet. In 2012 we will also be focussing on marketing issues, and seeking offtake and technical partners.
Like all rare earth developers I see the metallurgy as probably the greatest risk. However, since our rare earths are hosted predominantly in monazite, we are starting from a good place and we are optimistic about the prospects for a good solution. If we can successfully demonstrate a flow sheet I fully believe that Zandkopsdrift will be a mine.
There are many advantages to the project. I have already talked about the geological advantages – the size, high grade, the high grade zones, the zero strip ratio, the absolute grade of the ”big 5”, the conventional metallurgy, the potential for expansion - and the advantages of the location which has a benign climate and is low cost, mining friendly, and close to infrastructure and qualified labour. All this means that revenue per tonne can be high, capex and opex relatively low and permitting and development relatively quick. So Frontier is well positioned to take advantage of the positive fundamentals in the rare earth markets and become a major new global supplier of rare earths.
PI: Thank you