TORONTO (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.
Shares of the exploration company soared more than 27 percent to C$1.34 per share at market open on the Toronto Stock Exchange, and were trading at C$1.26 later on Monday.
The deal will see KORES invest in both Frontier and the Zandkopsdrift project, creating an off-take agreement that could commit up to 31 percent of future production.
“This actually alleviates a good deal of risk within the company and within the project,” said Byron Capital Market analyst Jon Hykawy. “They’ve gotten an excellent, excellent deal here with KORES.”
KORES, along with a consortium of five other Korean companies, will provide Frontier with technical and operational help to develop Zandkopsdrift.
Frontier will work with the group to investigate downstream rare earth production, including metals, alloys and magnets.
“This deal opens up opportunities for us to investigate and pursue downstream opportunities,” 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,” he added.
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, which has repeatedly clamped down on exports, sending prices for the individual oxides and metals soaring and leaving end users scrambling to secure new supply.
The Zandkopsdrift project, located some 450 kilometers (280 miles) north of Cape Town, is expected to produce some 20,000 tonnes of separated rare earths a year, with production expected to start in 2015.
The deposit is very large and has a good distribution of the more valuable heavy rare earths, said Jacob Securities analyst Luisa Moreno.
“They are going to be able to produce 100 to 200 tonnes of dysprosium and other heavies,” said Moreno. “That’s a significant part of the market right there. That’s what the Koreans are seeing.”
Under the arrangement, 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 state-run resource firm will then 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 stake would be calculated based on the company’s market value after it releases a preliminary economic study in the first quarter of 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.”
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 Jeffrey Hodgson
Our Standards: The Thomson Reuters Trust Principles.