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(Reuters) - Frontier Rare Earths Ltd FRO.TO said on Monday it signed a definitive agreement to partner with Korea Resources Corp (KORES) to fast-track the development of the Zandkopsdrift rare earth project in South Africa.
The agreement involves an investment by KORES in both Frontier and the Zandkopsdrift project, along with an off-take agreement that could commit up to 31 percent of future production.
"I think this will allow us to significantly accelerate and derisk our project," Chief Executive James Kenny told Reuters. "I think this puts us heads and shoulders above what one might regard as the chasing pack behind Lynas and Molycorp."
U.S.-based Molycorp MCP.N and Australian miner Lynas LYC.AX are the front-runners in the race to build up a supply of rare earths, which are essential to technology items like smartphones and hybrid cars, outside of China.
About 95 percent of the world's production comes from China, This Asian nation has repeatedly clamped down on exports sending prices for the individual oxides and metals soaring, leaving end users scrambling to secure new supply.
KORES will acquire an initial 10 percent interest in the Zandkopsdrift project to secure off-take rights for 10 percent of production, Frontier said.
The Korean state-run resource company will also have the right to acquire a further 10 percent interest in the project and up to a 10 percent share of Frontier. This would give KORES access to 31 percent of production at Zandkopsdrift.
Frontier did not give a monetary figure for the deal, but said the value of the initial 10 percent would be calculated based on the company's market value after it releases a preliminary economic assessment (PEA) in early 2012.
"There will be a price point taken after that, and that will calculate enterprise value," said Kenny. "But subject to a minimum share price of Frontier, which is C$2.39."
Shares of Frontier closed at C$1.05 on Friday on the Toronto Stock Exchange.
Frontier expects to produce about 20,000 tonnes of separated rare earths annually from Zandkopsdrift, which is located 450 kilometers (280 miles) north of Cape Town.
The company plans to put out a PEA in the first quarter of 2012, with a prefeasibility study six to seven months later. It hopes to start production at Zandkopsdrift in 2015.
The definitive agreement follows an earlier non-binding deal signed by KORES and Frontier in July. KORES confirmed the official agreement on Sunday.
KORES also said it had signed a memorandum of understanding with five other domestic companies -- Hyundai Motor Co, Samsung C&T Corp, GS Caltex Corp, Daewoo Shipbuilding & Marine Engineering Co Ltd and Aju Corp - to take part in the project.
Additional reporting by Bhaswati Mukhopadhyay in Bangalore, editing by Sriraj Kalluvila, Dave Zimmerman