Frontier at 58 cents may soon trade near cash value, yet it owns a massive REE project in Africa
Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.
Frontier was originally presented to paid Ticker Trax subscribers in early July. This is a very promising (but little known) rare earth play in South Africa.
Frontier Rare Earth (TSX: T.FRO, Stock Forum; 58 cents)
The low valuation on this company makes Frontier well worth the time to research - in particular after the July 11th news. This is one of those companies that has a very small following but has the potential to surprise (quite dramatically) to the upside if all the pieces fall into place over the next six to 12 months. The stock can be tightly held in the 50-cent range but it has been generating decent liquidity near 60 cents this past month.
Shares Outstanding: 90 million/Market cap of $54 million at 60 cents
March 31st Net Cash - $37 million
The company issued news on July 11th that in September they will receive payment of $24 million from its Korean joint venture partner (Korea Resource Corporation - Kores).
This payment is not only worth 27 cents per share, but the fact Kores is paying for a 10% interest in the Zandkopsdrift rare earth project (REE) assigns a fair market value of at least $240 million for Zandkopsdrift - equivalent to $2.67 per FRO share.
Assuming the September payment comes through and Frontier's strong cash position from March is intact, the current share price would be equal to the net cash value of the company with nothing assigned to this giant REE project.
What is equally interesting is the following statement from the July 11th news release:
"Under the terms of the agreement Kores has the right to form a consortium of Korean companies to jointly participate with it and Frontier in the development of Zandkopsdrift. Kores has advised Frontier that it has been engaged in detailed discussions with several leading Korean corporate groups and it has been agreed that Kores will have until Sept. 30, 2012, to finalize arrangements with the Korean consortium."
Kores is wholly owned by the Korean Government. The Kores consortium consists of Samsung, GS Group ($36 Billion 2010 revenue), Daewoo Shipbuilding, AJU Global (2010 revenue of $800 million) - it is this group that FRO is hoping can help finance the $1 billion needed to put Zandkopsdrift into production (annual cash flow estimated at $700 million).
"The Korean government has designated rare earths as a strategic raw material for Korea's future economic growth and has selected Zandkopsdrift source of their future rare earth supply" [Kores]
Rare earth industry
The rare earth industry has struggled all year but is beginning to show very noticeable signs of life again. Demand has not disappeared by any means, but the high-flying junior REE exploration stocks have all quietly gone into recession.
Within this industry, the cream will rise to the top because the concern all along has been that China will continue to dominate the REE industry. This is a huge risk for Korea and Japan whose manufacturing industry is critically dependent upon REE's.
Enormous potential of the Zandkopsdrift REE Project
Back in March 2011, Frontier released a preliminary economic study on Zandkopsdrift and the economics were extremely strong (reference the table on page 2 of this report) - but so was the capital cost to put this into production. The problem is - no one believes it will be done in this economy – and that is why the stock trades where it does and is all but ignored in Canada.
There are many examples recently where investors have grossly underestimated the potential of these world-class projects. In the last two months I have seen five takeovers of TSX or TSX.V resource stocks where the takeover price has been 40% to 140% higher than the previous close. Obviously these companies were trading far below fair market value.
With respect to Frontier I think American and European investors are completely unaware this company exists and Canadian money managers simply see a South African based exploration company in an out-of-favor sector.
Even June 29th the company issued a news release stating they hit high grade REE mineralization of 10% to 19.5%. Not only are these huge numbers for a rare earth mine but the mineralization was shallow (below 100 m) making it very economic - high grades with low overburden strip mining is a perfect mining scenario for almost any commodity let alone high value rare earths.
The day of that June 29th news release, the stock was lucky to trade a few thousand dollars - it is shocking how little interest there is in this company.
Note what appears to be the Primary Risk: South Africa has been experiencing all kinds of problems in the mining industry - demands by certain political groups to nationalize mining, labor disputes and strikes, high labor and operating costs.
If Kores puts together a consortium of major Asian players to help finance and build a mine here, this will do exceptionally well. If not, it becomes a waiting game like everything else lately. Tough call, but a VERY interesting company none-the-less.
The Globe and Mail reports in its Friday, Feb. 24, edition that CIBC World Markets analyst Matthew Gibson remains somewhat bullish on Frontier Rare Earths ($1.24), though he felt the need to trim his target price. The Globe's Darcy Keith writes in the Eye On Equities column that Mr. Gibson is sticking with his "sector outperformer-speculative" rating on Frontier. The analyst, however, cut his price target down to $4.90 from $6. Frontier has released a preliminary economic assessment of its Zandkopsdrift deposit in South Africa, with capital expenditures expected to reach $1.1-billion [ Feb 24, 2012 ]
The following are excerpts from recent Media pertaining to the REE Sector
1) New York Times (July 12th) -China, the world's biggest producer of rare earth metals, is expected to become an importer of some of the materials as early as 2014 as it continues to develop its high-technology industries.
For more than two years, China has been trying to curb exports of rare earths, in part to redress environmental damage from decades of mining, and last year it effectively shut down its rare earth industry for three months. The country has also made it clear that it would prefer to be the biggest consumer of rare earth metals rather than the biggest producer.
Today, appetite for rare earths - a group of chemical elements that are crucial for new technologies as varied as smartphones, hybrid cars, missiles and wind turbines - is growing fast in China. Efforts to expand the industrial chain mean that China, which produces more than 90 percent of the world's rare earths, is now consuming 65 percent of global output, up from 25 percent a decade ago.
While tight export controls in China have led to trade disputes with the United States, Japan and Europe, Beijing's priorities extend beyond control of the supply and prices of rare earth elements. China also hopes to dominate products like magnets, which can be made smaller and more powerful with rare earths.
"The control over global rare earth output is important as far as it buys China the time needed to establish the supply chain," said Jane Nakano, an energy and national security fellow at the Center for Strategic and International Studies in Washington.
2) Wall St. Journal (July 12th)
Beijing -China's largest rare-earth producer (Inner Mongolia Baotou Steel Rare-Earth Group) plans to launch a trading platform, according to a company newsletter, in the nation's latest attempt to exert more control over the pricing of the strategically important minerals. Baotou is leading about 10 major Chinese rare-earth producers to set up the platform, it said.
The market for rare earths is largely opaque because they aren't sold in public markets and move in small volumes, and only a few private-sector and government sources provide pricing data. A trading platform could provide some clarity, but if successful it could also give a China-based entity a role on determining rare-earth prices.
China controls about 95% of the world's rare-earth production, and its attempts to restrict exports have become the basis of a trade complaint by the U.S., Europe and Japan at the World Trade Organization.
Last month, the U.S. Trade Representative said the Obama administration remains "deeply troubled" over China's restrictions on the exports of rare earths and is deciding on its next course of action after concluding consultations with Beijing through the WTO.
3) MarketWatch (July 4th) - China has started strategic stockpiling of rare-earth minerals for the first time, the state-run China Securities Journal reported Thursday.
Beijing in May 2011 announced its intention to build strategic stockpiles of rare-earth minerals, which are crucial to the manufacturing of many high-tech products, and a recent decline in prices prompted it to begin, the newspaper said, without providing details. Fiscal funds will be allocated to those companies that help Beijing acquire the resources.
The move to stockpile rare earth elements will add to investor worries that China is pursuing a backdoor strategy of hoarding the metals in order to influence their prices.
Some speculators argue that China's goal is to create the ultimate monopoly by driving up export costs to the point that manufacturers are forced to relocate their facilities to the People's Republic.
In addition to this weekend column and the bottom fishing research sent to paid Ticker Trax subscribers on Monday, I also provide free MicroCap alerts throughout the week. These are based upon News or Abnormal Price/Volume Activity on the several hundred stocks we track from our own research, brokerage analysts, or third-party newsletter writers.
Disclosure: Danny Deadlock owns 30,000 shares of Frontier Rare Earth (TSX: T.FRO).