Frontier Rare Earths (TSE:FRO) received a huge vote of confidence from equity research firm Jacob Securities, giving the Luxembourg-based rare earth explorer an initial price target that is more than four times its current trading price, along with a speculative buy rating.
Frontier, founded in 2002, is developing a portfolio of rare earth assets in South Africa, with its main holding being the Zandkopsdrift deposit in the Namaqualand region of the Northern Cape Province, currently the largest NI 43- 101 compliant rare earth resource in Africa, and one of the largest in the world.
Estimated resources amount to 43.7 million tonnes, at an average grade of 2.16%, but the deposit remains open laterally and at depth, which Jacob notes could extend mine life even further than the current 20 year calculation. Capital costs per tonne, as well as absolute capital costs, are expected to be lower than the company's peers, with similar total anticipated production.
The equity research firm also said that the resource size of the property, and expected production of 20,000 tonnes, combined with a "unique" rare earths distribution, means that Frontier could produce more volume of the critical elements than some of the more advanced junior companies, with higher percentages of the higher value heavy rare earths.
According to Jacob's report, Froniter's Zandkopsdrift has solid levels, about 22% by volume, of the critical rare earth elements, more than certain light rare earth deposits owned by Molycorp, making Frontier a prime takeover target. The project is also said to have good surrounding infrastructure and possible synergy opportunities from a rare earth cluster in the area.
Rare earth demand is driven, in large part, by two fast-growing sectors, energy and high technology, as they are used in the manufacturing of anything from rechargeable batteries, hybrid/electric cars, and wind turbines to flat panel displays, lasers, radar, and weapon guidance systems.
Due to their unique attributes, new applications are constantly being developed for rare earths. While demand for the metals is expected to continue growing steadily, China, which produces 97% of the world’s rare earths, has cut exports by more than half of 2004 levels to 30,000 tons in 2010.
Meanwhile, projects outside China are only now ramping up production. As a result, prices outside of China have risen 706% on average since January 2009. This tightened market has created vast opportunity for those that can begin rare earth production quickly, such as Frontier, which is targeting production for 2015.
In the bullish research report, Jacob noted that when China eventually becomes a net importer of rare earths, it will likely find easier partners in Africa, the location of Frontier's assets, due to high mining asset protectionism in North America and Australia.
"We believe the potential of the project is somehow poorly understood and off the radar for most investors, in particular the retail investors, who have been very active in this sector," Jacob concluded.
"From the IPO in 4Q 2010, Frontier raised more than US$60 million, enough to fund the project to the end of the feasibility study."
Frontier owns 74% of of the Zandkopsdrift project, with the remaining 26% owned by the Historically Disadvantaged South Africans, in agreement with the South African Black Economic Empowerment (BEE) equity ownership requirements.
The company is entitled to a payment from its BEE partner equivalent to 21% of the value of the project on completion of a feasibility study, thus giving an effective 95% economic interest in the property.
In January, Frontier, which has no debt and $50 million of cash on hand, began a 20,000 metre drilling program, from which samples will be used for the ongoing metallurgical work and to improve the confidence level of the resource. A preliminary economic assessment is expected by the fourth quarter.
Jacob assigned Frontier a price target of $C9.83, up from the company's current trading price of $2.06.