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Politics May Soon Be as Important as Prices on Rare Earths
If you are not familiar with Rare Earths (REE’s) you can educate yourself further here:
To view the Rare Earth Applications chart, please click on the link:
In 2011 the price of rare earths went through the roof and along with that went junior REE exploration companies. As the froth came off the sector and China lost full control of pricing, the stocks fell back to earth.
It has now been two and a half years and China is beginning to influence control over pricing again.
In fact a recent report out of China has them spending over $1 Billion in October to rebuild REE inventories and firm up pricing on medium and heavy REE’s
1) China to Increase Rare Earth Purchases – Sept 24th
At the same time the U.S. is trying to push through a bill that would speed up mining and exploration permits for rare earth projects in the United States. A move designed to try and break US dependence on other countries
– because these metals are critical to their defense industry.
2) U.S. House of Representatives Passes Critical Minerals Act – Sept 23rd
The United States is not the only country seriously worried about their dependency on China for strategic rare earth metals. This industry is not just about pricing and economics – it is about politics.
A huge percentage of rare earths go into critical technology including defense.
One simply needs to look at Japan and South Korea
. Two huge electronics manufacturers critically dependent upon REE’s. Yet two countries who cannot afford to trust China for their long term rare earth supplies.
THE HEAVY HAND OF CHINA
"Two years ago, China raised (REE) prices - in the case of Neodymium, used to make Prius electric motors stronger and lighter, from $15 a kilogram in 2009 to $500 in 2011, while Dysprosium oxide used in lasers and halide lamps went from $114 a kilogram in 2010 to $2,830 in 2011. It's also about the time China cut off supplies to Japan, maker of the Prius, in a dispute over international fishing territory."
Not only is the economy of Japan and South Korea dependent upon demand of the technology sector, but the supply chain is crucial. If China wants to exert their influence “politically” over this entire region, they can do so by controlling the rare earth industry. Price becomes a secondary concern and supply takes center stage.
It is also very difficult for Japan and South Korea to depend upon other countries that have rare earths in production or mines in development. Almost every developing country has a concern with the rare earth industry.
In particular those countries tied to manufacturing and development of electronic components associated with consumer electronics (including smart phones and tablets), automotive, or defense.
China, South Korea and Japan have deep economic ties specifically related to the manufacturing of parts. Yet Japan’s relationship with China and South Korea is being strained and China overall has the region on edge as they try to influence their control over key waterways and strategic islands.
Japanese investment in China fell 31% from 2012 to 2013 and Japanese investment in South Korea fell 35% over the same period. Relations between China and South Korea are more stable (China is South Korea’s number one trading partner) but relations are frequently strained over North Korea and China’s heavy hand with respect to regional waterways and strategic islands.
SOUTH KOREA: TECHNOLOGY TITAN
South Korea ranks among the top three in terms of the production and trade of IT equipment, and accounts for almost 6% of the world production and export volume. They are also the third largest economy in the Asia Pacific
Exports make up half the Korean economy (one of the highest rates globally) and three of the world’s largest companies are in South Korea - Samsung, Hyundai and LG. All three of these companies are critically dependent upon the manufacturing of electronics and related components.
REE’s are critical to Samsung, Hyundai and LG – in fact, they could not survive without them.
Should something happen between China and South Korea that disrupted the supply of Rare Earths, it would be economically devastating to the country. While the odds of this happening are minimal, it is not something South Korea (or Japan) can gamble with. Neither country has their own economic supply of rare earths so they must look elsewhere.
Korea Resources Corporation (KORES) is a Korea state owned energy and resources company established in 1967. The company has close ties with Korea’s largest corporations. “In 2008, KORES was reborn with a vision to grow into one of the global top 20 players in the mining and resources sector by 2020.”
In December 2012, KORES closed a partnership deal with Frontier Rare Earths Ltd.
, Stock Forum
). KORES paid $23.8 million for a 10% interest
in FRO’s Zandkopsdrift Rare Earth project in South Africa.
Zandkopsdrift is a Very large REE project that would require approx. $1 Billion to put into production. However, the estimated annual cashflow is almost $700 million
At the time of the investment, KORES made the following public statement:
"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"
Frontier Rare Earth (FRO.V 40 cents)
Shares Outstanding: 89 million
Net Cash to end of June: $39 million = 44 cents per share
One of the largest undeveloped rare earth projects in the world.
Because the stock trades near or below cash value, the stock market is valuing this REE deposit at ZERO
- primarily because investors feel they would be unable to finance a billion dollar mine. While I could understand “discounting” the project, saying it is “worthless” makes little to no sense. In particular when you take into consideration the involvement of KORES and the strategic importance of REE’s to the South Korean economy.
To view the stock chart, please click on the link: http://www.stockhouse.com/media/tickertrax/fro1.jpg
Preliminary Economic Assessment completed March 2012:
> confirms Zandkopsdrift’s potential to become a major producer of separated rare earth
> NPV of $3.7 Billion generating a post-tax IRR of 53% and 2 year payback
> Frontier controls mineral rights over 60,000 hectare in and around where the Zandkopsdrift deposit is located.
> 35km to nearest railhead and 300km north of deep water port
To view details of the Preliminary Economic Assessment please click on the link:
REE METAL VALUES
Various elements and metals make up REE’s but the following are amongst the most valuable:
SEPT 11 PRICES - $ PER KG (CHINA FOB)
Praseodymium (light) $115
Neodymium (light) $80
Europium (Heavy) $1,075
Terbium (Heavy) $925
Dysprosium (Heavy) $530
Within the Zandkopsdrift deposit they expect to mine the following from the above list:
Neodymium (light REE) $80 – would contribute approx. 30% to overall revenue
Praseodymium (light REE) $115 – would contribute approx. 13% to overall revenue
Europium (Heavy REE) $1,075 - would contribute approx. 18% to overall revenue
Dysprosium (Heavy REE) $530 - - would contribute approx. 13% to overall revenue
Combined these four high value REE’s would contribute to over 70% of Total Mine Revenue
Interview Excerpts from an August 2013 interview with the CEO of FRO
“We don’t need to be pioneers, as we are taking metallurgical processes that are already out there for the conventional host mineral monazite, and are essentially trying to optimize them to ultimately get the best outcome in terms of capital and operating costs,” says Kenny in an interview with Proactive Investors. “The flow sheet to crack monazite has been around for decades, and for this reason, we are very fortunate compared to the vast majority of other junior rare earth companies that do have host minerals that have never been commercially exploited.”
Since the preliminary economic assessment report released last year and even since the last update in November 2012, the company has told investors that a number of improvements have been made to the flow sheet for the processing plant. It is planning to start rare earth production in 2016, with a total target capacity of 20,000 tonnes per year of separated rare earth oxides.
“We will see huge demand from large corporates 5, 10 and 15 years down the road from the automotive and electronic industries such as those in Korea, Japan, China and Germany, with that consumption largely having to be met with China-sourced production unless a number of western mines can get into production,” says Kenny.
“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 REE sources. We fully expect Frontier to be one of these major sources.”
After the prefeasibility study is released later this year, Kenny says the next step will be the definitive feasibility study, which he anticipates will take about 12 months from commencement, taking the company to the end of 2014. Assuming capital can be raised, the construction phase is pegged at approximately two years, with first production targeted on that basis for late 2016 or early 2017.
Frontier has a small audience because (unlike typical Canadian listed mining companies) they have no promoters or corporate communication in Toronto, Calgary or Vancouver. Instead their head office is in Luxembourg with satellite offices in Cape Town and Shanghai.
Disclosure: Danny Deadlock owns 40,000 shares of Frontier.