James Kenny: Bottoming prices and policy uncertainty in REE market keep opportunities open for production outside of China
----Interview with James Kenny, CEO of Frontier Rare Earths
Frontier Rare Earths (TSX: FRO / US: FREFF) is a mineral exploration and development company that is principally focused on rare earth elements - critically important minerals in high demand in the fast growing electronics, automotive, energy and clean-tech sectors.
Asian Metal: Good Morning James, thank you for granting us this interview. Could you please give us an introduction to Frontier Rare Earths?
James Kenny: Frontier Rare Earths (TSX: FRO / US: FREFF) is a mineral exploration and development company that is principally focused on rare earth elements - critically important minerals in high demand in the fast growing electronics, automotive, energy and clean-tech sectors.
Frontier’s flagship asset is the Zandkopsdrift rare earth deposit, which is located in the Northern Cape Province of South Africa and is one of the largest, code compliant, rare earth deposits under development worldwide. Zandkopsdrift’s favourable location and geological setting are expected to provide significant advantages in relation to capital costs, operating costs and development time compared to many other rare earth projects currently being evaluated, and makes Frontier well positioned to become one of the significant new producers of separated rare earths globally, with a total target production rate of 16,000 tonnes per annum of high purity separated rare earths.
In December 2012, Frontier completed a definitive joint venture agreement with Korea Resources Corporation (Kores), the natural resource and mining investment arm of the South Korean Government, in relation to the development of Zandkopsdrift. Korea has designated rare earths as a strategic raw material for Korea’s future economic growth and has selected Zandkopsdrift as a prime source of their future rare earth supply. Under the agreement, for a cash payment of $23.8m Kores acquired an initial 10%, fully participating interest in Zandkopsdrift, along with off-take rights to acquire 10% of the annual rare earth production from Zandkopsdrift at market prices. Frontier has completed a Preliminary Economic Assessment on Zandkopsdrift which confirmed the significant economic potential of the project and Pre- Feasibility Study on Zandkopsdrift is at an advanced stage and scheduled for completion in Q1 2015.
Asian Metal: A lot has happened in recent months with regards to the removal of export quotas and persistence of export tariffs in China. What impact do you expect this could have on pricing and demand in the sector?
James Kenny: China has accepted the 2013 WTO ruling and confirmed the scrapping of China’s rare earth export quota system. However China has also just announced a number of new measures to allow it to monitor and control the output of rare earths based around export licenses and taxes.Without an export licence companies will be prohibited from exporting rare earths and as such we could continue to see restricted supply of rare earths to the rest of the world.
However, several things are still unclear including whether western joint-venture (JV) companies will be allocated exported licences, how the new taxation regime will operate and whether it will be different for 100% Chinese owned operations and international JVs.
All of these factors will create short-term uncertainty and although overall I expect that these measures will contribute to higher rare earth prices and future constraints on rare earth exports. In the longer term China seems to be directing its rare earth industry towards the production of more value-added rare earth products rather than the production and sale of rare earth in chemical or ‘raw’ form.
So, in summary I believe that this new system will create much more uncertainty for buyers outside China as their deals will effectively be subject to approval from the Chinese government on an export order by export order basis. In the past, if a supplier had quota, buyers would be reasonably assured of receiving supply.
The demand dynamic is more complex as if a manufacturer chooses to pursue alternatives to rare earth based components they are in many cases accepting that they will not have the best technology which in turn gives an advantage to Chinese manufacturers whose products and technologies have rare earths at their core. Overall, if supply is assured and pricing reasonable then the demand case for rare earths remains robust.
Asian Metal: What downstream markets does the company hope to tap into? Rare earths represent a portion of a number of products. What sectors look to continue growing?
James Kenny: Rare earths are widely recognized as being among the most valuable and strategically important minerals in the world. Among their key properties, rare earths have high thermal and electrical conductivity magnetism, luminosity, catalytic and optical properties.
Current rare earth applications include hybrid electric vehicles, cell phones, mp3 players, personal digital assistant devices, wind turbines, fiber optics, computer and television screens and compact fluorescent lighting. Rare earths are critical to maintaining a modern, functioning green economy.
By 2020 global rare earth demand is estimated to be up to 200,000 tonnes per annum, up from approximately c.110,000 tonnes in 2012 and underpins the need for development of new sources of rare earth supply outside of China. Those rare earths used in magnet based applications are forecast to grow at the highest rate of c.10%+ per annum.
Frontier expects to produce 14 high purity separated rare earth products (in oxide form) and will in time look to develop a capability in the production of rare earth alloys and metals.
Asian Metal: Rare Earth prices suffered throughout most of 2014. This has made it tough to leverage interest from investors and buyers at times. What are your predictions for 2015? Will we see a turn around? Have prices bottomed out and perhaps why?
James Kenny: No doubt, many critical metals investors will be closely watching for the effects of the WTO ruling against China and the implementation details of China’s policy changes in the next few months. In a non-exchange traded market such as that for rare earths it is hard to make price forecasts but overall I think prices have bottomed and we will see an increase in rare earth prices over 2015 reflecting amongst other things the increasing cost of production in China, higher environmental standards and the associated cost of compliance, a clamp down on smuggling and the introduction of the new production and other taxes as recently announced.
Asian Metal: What is in the cards for Frontier in 2015? What developments or direction does the company plan to take? What is the next step for Zandkopsdrift?
James Kenny: Our immediate focus in 2015 is on completing our Zandkopsdrift prefeasibility study in Q1 2015, and then commencing a definitive feasibility study in H2 2015. We also expect to secure a mining right for Zandkopsdrift and also receive all six environmental permits and approvals necessary for the development and operation of the Zandkopsdrift project in 2015.
Asian Metal: What are the challenges facing Frontier and Zandkopsdrift? Is there still room for a non-Chinese rare earth producer in light of market conditions?
James Kenny: The biggest challenge in the current market conditions is actually the continued availability of capital from the equity and debt capital markets to finance the development of Zandkopsdrift. In order to ‘unlock’ the requisite finance I believe that major rare earth consumers will have to work with prospective rare earth producers and be willing to enter into off-take commitments to give the providers of capital sufficient comfort as to the market for the finished products. However I believe that many such major rare earth ‘consumers’ do not fully appreciate the mine development life cycle and assume that they can just sit back and wait until new mines are developed and supply comes on stream. This would be a major mistake and could lead to a significant rare earth shortage within this decade and a dramatic increase in rare earth prices.
While the outlook for both Molycorp and Lynas is quite uncertain at present given their well-publicized difficulties and complicates any conventional analysis I believe that there is definitely room for new non-Chinese producers and particularly those producers who can produce high purity separated critical rare earth oxides which are used predominantly in fast growing magnet based applications.
Asian Metal: Finally, how important are strategic partnerships such as Frontier’s with Kores in order to reach production of a mine? There are many angles in assessing a mine’s probability of success. What is the driving force for Frontier that will lead to success?
James Kenny: We will see huge demand from large corporates 5, 10 and 15 years down the road particularly from the automotive and electronic industries such as those in Korea, Japan, China and Germany, with that consequent rare earth demand largely having to be met by China-sourced production, unless new western mines can get into production. A strategic partnership which can bring off-take, capital, technical and operating support will be a major differentiator amongst those companies seeking to develop a rare earth mine. As one of only a few companies to have attracted a major backer in the form of the South Korean Government, Frontier’s strategic partnership with Kores is vitally important and we believe will play a significant role in Frontier’s future success.
However, there is a very real expectation that the way demand is likely to develop, China will be unable to supply these critical rare earth oxides in the quantities forecast, and it will be incumbent on these big users to go out and find western rare earth sources. We fully expect Frontier to be one of these major sources.
We are also encouraged by the definitive strategic partnership agreement concluded with Kores, compared to various preliminary non-binding memoranda of understanding (MOU) deals inked by some of our peers. It is very encouraging for us, as we have a credible private party coming in through a straight cash deal, reflecting the significant value of Frontier.
It is hard to see how that is priced in to our stock at the moment, however Frontier’s value proposition can be defended under several different metrics, highlighted by the fact that Kores paid $23.8 million in cash for the initial stake. The company, with a cash position of just over $25 million, is trading at around 18 cents, giving it a market cap of some $-9million.
Asian Metal: Thank you very much James for your time, we wish you and your business the best of luck!
