A little under a year ago, South Korean government-owned mining and natural resources investment company Korea Resources Corp. (Kores) signed a deal with Frontier Rare Earths (FRO-T) to take a 10% interest and get the rights to an equal percentage of future production from the junior’s Zandkopsdrift rare earths project in South Africa for $23.8 million. Under the deal, Kores also retained an option to raise its stake to 20% after Frontier completed a definitive feasibility study.
The two companies have now revised that agreement, giving Kores the option to boost its stake to a 50% or equal interest with Frontier, and get a matching percentage of offtake rights after completing a definitive feasibility study, widely expected in the fourth quarter of next year. Under the agreement, Kores is also responsible for arranging project finances and providing funding for project development costs that are not covered by project finances.
“The potential expansion of the joint-venture relationship between Frontier and Kores will provide significant cash resources for the eventual construction of the project,” Matthew Gibson of CIBC World Markets writes in a client note, adding that the most recent cost estimate for the overall project has reached $1.2 billion.
The deal “will provide Frontier with an upfront cash amount that could be used to offset its equity component of the initial capex,” Gibson continues. “Kores will also seek out project finance for the mine, mill and separation plant on a best-efforts basis. We are expecting the debt package to cover seventy percent of the initial capex, similar to other Kores deals.”
Gibson notes that the revised agreement “keeps the door open for another strategic investor to come in and take twenty percent of the project, which would terminate the equal partnership, reverting to the original additional ten-percent agreement.”
Once in production, Zandkopsdrift “has the potential to be one of the next significant rare earth projects to go into production outside of China,” Gibson claims. “While in the early stages of development, this project may come into production before many of its peers.”
He expects the company can complete a definitive feasibility study in the fourth quarter of 2013 and has a 12- to 18-month target price on the stock of $1.50 per share. At press time Frontier was trading at 64¢.
Jon Hykawy of Bryon Capital Markets argues that having Kores as an equal partner in Zandkopsdrift “may prove valuable to current shareholders,” but says “the devil, in this case, is in the valuation.”
“At present, we cannot determine how the possibilities will play out,” he explains in a research note. “If we value Frontier using our standard discounted cash flow techniques, our published REO price deck and a 15% discount rate, then we would set a $1.25 target price. However, given the difficulty in financing mining projects at present, our rating will remain a ‘hold.’ Until such a time, as we gain additional clarity with respect to the development of Zandkopsdrift, we continue to believe that caution is advisable.”
A preliminary economic study of the Zandkopsdrift project in March concluded that the mine would produce 20,000 tonnes of separated rare earth oxides (REO) a year over a 20-year mine life. The study estimated capital costs of US$910 million for an on-site concentrate plant, an off-site rare earth separation plant and a 1-million-tonne-per-year open-pit mine.
The PEA set the after-tax net present value of the project at US$3.65 billion at an 11% discount rate, and an internal rate of return of 52.5%. The payback period was estimated at two years with production expected by July 2015.
According to a 2011 resource estimate, Zandkopsdrift’s Central zone hosts 16 million indicated tonnes grading 3.09% for 495,060 tonnes total REO (TREO), and inferred resources of 4.5 million tonnes grading 2.85% TREO for 129,160 tonnes TREO. A 2% TREO cut-off grade was used for the Central zone.
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