Frontier Rare Earths (TSE:FRO)(TSE:FRO.WT) Monday signed a definitive agreement with state-owned Korea Resources Corp (KORES), to form a strategic partnership designed to accelerate the development of Frontier's flagship Zandkopsdrift rare earth project in South Africa.
Investors cheered the news, with Frontier shares up 20 percent to $1.27 Monday afternoon.
The company announced the initial deal in July. KORES is a mining and natural resource investment company.
KORES also said it intends to form a consortium comprised of a number of leading Korean companies to join the Frontier joint venture, including Samsung Group, Hyundai Motors Group, GS Group, Daewoo Shipbuilding & Marine Engineering Group (DSME), and AJU Group.
"We are proud that the KORES together with a consortium of leading Korean companies, such as Hyundai Motors and Samsung, have identified Zandkopsdrift as a key source of future rare earth supply.
"The consortium companies have combined annual sales of approximately $300 billion, so their willingness to partner with Frontier is a strong statement about the economic potential of the Zandkopsdrift project, and the capabilities of our management team.
"Working together with our Korean partners, we are confident that Frontier will achieve its objective of becoming one of the first new large-scale rare earth producers outside of China."
The agreement involves an investment in both Zandkopsdrift and Frontier, as well as an off-take arrangement that could commit up to 31 percent of future production.
Under the terms of the agreement, the KORES Consortium will acquire an initial 10 percent stake in Zandkopsdrift and secure off-take rights for 10 precent of rare earth production.
The deal provides that the KORES Consortium can also acquire a further 10 percent interest in Zandkopsdrift and up to a 10 percent share ownership of Frontier, which, if acquired, would give Kores off-take rights for an additional 21 percent of rare earth production from the South African project.
Zandkopsdrift, located in the Northern Cape province of South Africa, is one of the largest undeveloped rare earth deposits worldwide.
Korea's high tech sector is a prime target for rare earth mining companies outside China looking for a financial partner to help develop their assets.
This is because rare earths 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. Demand for the metals is expected to continue to grow steadily as China, which produces 97 percent of the world’s rare earths, has cut exports by more than half of 2004 levels to 30,000 tons in 2010.
But projects outside China are only now ramping up production. As a result, prices outside the country have risen 706 percent 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.
KORES' president and CEO, Shin-Jong Kim, added: "In order to support Korea’s high technology, automotive and other industries, the development of Zandkopsdrift will be a strategic priority project for the KORES Consortium and a critical element of KORES’ efforts to secure a long term, stable source of rare earth supply for Korean industry.
"KORES and Frontier management have developed a strong working relationship and we look forward, together with our Korean consortium partners, to assist in Zandkopsdrift’s development as well as pursuing rare earth related downstream business opportunities."
In a conference call, president and CEO James Kenny said that consideration for the initial 10 percent equity stake in Zandkopsdrift would be in cash and at the minimum price would imply a payment of approximately $25 million.
Kenny said that the parties in the KORES consortium were users of rare earths and involved in the production and consumption of several downstream products.
He also said that Frontier has agreed with the Korean consortium to pursue downstream opportunities including alloys and magnets.
Frontier's objective is for Zandkopsdrift to begin production in the second half of 2015. To get there, Kenny said "several hundreds of million of dollars will be required" to build the mine, with the company looking to have financing in place by the first half of 2013 ahead of the mine's estimated two-year construction period.
Frontier's most current NI 43-101 report for the Zandkopsdrift property includes a resource of 43 million tonnes, at an average grade of 2.2 percent total rare earth oxides (TREO).
In mid-November, the company said a preliminary economic assessment (PEA), due in the first quarter of 2012, was "at an advanced stage". The company has also started a preliminary feasibility study on the property, which is due within six months after the publication of the PEA.
After Molycorp’s (NYSE:MCP) Mountain Pass and Lynas’ Mount Weld projects, the Zandkopsdrift B Zone has the highest TREO grade and the highest grade of high value heavy rare earth oxides of significant advanced deposits outside China.
Frontier Rare Earths is also exploring in the Namaqualand region of South Africa's Northern Cape, having been awarded prospecting rights for a "highly" prospective property covering approximately 75,000 hectares in September.
Oxides that are produced from processing rare earth elements are used in magnets for electric motors such as those found in wind turbines, in energy-efficient fluorescent lightbulbs and in electric car batteries.