Interview: James Kenny of Frontier Rare Earths (TSX:FRO)

CEO James Kenny believes the TSX was the perfect place to list Frontier Rare Earths.

The completion of an IPO earlier in late 2010 marked the arrival of a new late-stage player on the Canadian listed rare earths scene, Frontier Rare Earths. Frontier began trading on the TSX exchange on November 17th, 2010 after the completion of a $60 million unit financing at $3.40 concurrent with the company’s IPO. The unit offering consisted of 1 share and 1/2 share purchase warrant at $4.60 expiring after 2 years. Since then, the company’s shares have been trending down hitting a low of $1.86 earlier this month and are now trading at $1.97.

Frontier’s flagship project is the Zandkopsdrift rare earth element deposit in the Northern Cape province of South Africa. The company’s NI 43-101 technical report states that Zandkopsdrift is one of the largest known undeveloped rare earth deposits outside China. The independent report, prepared by South African consultants MSA Group in October, 2010, identifies an indicated resource of approximately 23 million tonnes at an average grade of 2.32 percent TREO, representing 532,000 tonnes of contained TREO. In addition, the report identifies an additional inferred resource of approximately 21 million tonnes at an average grade of 1.99 percent TREO, representing 415,000 tonnes of contained TREO. Frontier hopes to supply up to 20,000 tonnes per year of REO and is working on validating the production potential from the ongoing prefeasibility study projected to be completed towards the end of this year. The company is quick to point out that their Zandkopsdrift B Zone, which is contained within the overall Zandkopsdrift resource estimate, is the third highest grade rare earth deposit outside of China after Lynas and Molycorp.

Jacob Securities Analyst Luisa Moreno likes Frontier Rare Earths, she has a price target of $9.83 on the stock. In a report from June 8th, 2011, she states, “Although Molycorp’s grade at Mountain Pass deposit is 8.28% compared to Frontier’s with 2.16% TREO, Frontier’s critical heavy element grades (dysprosium, europium and terbium) are higher, which means that Frontier will be able to produce more of these critical materials (circa 370 tonnes) and generate higher sales for these elements than Molycorp (circa 80 tonnes) despite Molycorp’s overall production target being twice that of Frontier.”

The Prospecting Right for Zandkopsdrift is held by Sedex Minerals, a South African company that is 74% owned by Frontier while the remaining 26% of Sedex is held by South Africa’s Black Economic Empowerment (BEE) through which 21% ownership is extended to Namaqualand Empowerment Trust (NET). NET is a broad-based community trust established for the benefit of historically disadvantaged South Africans principally in the Namaqualand region of the Northern and Western Cape Provinces of South Africa. From the BEE Commission Report in 2002, the post-apartheid program is aimed at redressing the imbalances of the past by seeking to substantially and equitably transfer and confer ownership, management and control of South Africa’s financial and economic resources to the majority of the citizens. It seeks to ensure broader and meaningful participation in the economy by black people to achieve sustainable development and prosperity. An interesting approach that has proven to be somewhat successful in South Africa.

Although Frontier has a direct 74% interest in Zandkopsdrift, company Chief Executive James Kenny noted that the provisions of  Sedex’s shareholder agreement in fact gives Frontier an effective 95% economic interest in Zandkopsdrift when he connected with

Frontier recently completed an IPO on the TSX raising $60 million via a unit offering at $3.40 per unit on the strength of your rare earth project in South Africa. Could you talk about the genesis of the project prior to your IPO?

I have been involved in the natural resource earth sector for many years as have other members of my family. In 1994 I travelled to South Africa for the first time, shortly after the first democratic elections which followed Nelson’s Mandela’s release from prison. Although South Africa is a country abundant in natural resources, it had virtually no junior mining industry due to the apartheid regime. With the country opening up to foreign investment I travelled to South Africa with my brother, Philip, and my father. On an early visit we were very fortunate to meet a renowned diamond exploration geologist by the name of Hugh Jenner-Clarke who had, at that time, spent over 40 years in the diamond exploration sector in South Africa and elsewhere and had some important discoveries to his name.  On a handshake we formed a partnership with Hugh and established Firestone Diamonds plc, an emerging diamond producer now with operating diamond mines in Botswana and Lesotho. Firestone Diamonds is listed on the AIM market in UK and continues to be run by my brother Philip Kenny. In 2004 we decided to look at other mineral opportunities and identified the rare earth sector as one having very significant promise due to the now very evident trends of Chinese production dominance and the anticipated growth in demand for rare earths. We strongly believed that the west coast of South Africa and, in particular, the Namaqualand region was highly prospective for rare earths. The Zandkopsdrift Project area which hosts the Zandkopsdrift rare earth deposit which we are developing was at the time ‘open ground’ and we applied for and were granted a Prospecting Right covering 60,000 hectares in the area in 2006. Between this time and our IPO in November 2010 we advanced Zandkopsdrift to the point that the NI 43-101 report confirmed it as one of the largest, highest grade code-compliant resources in the world outside of China.

The deposit is a carbonatite complex and the rare earth mineralization is principally contained in a monazite complex. What sort of challenge do you expect to face cracking the minerals in your deposit and describe the availability of the associated technologies?

Rare earths do not occur in free form and are bound up in host minerals from which they must be cracked or liberated. Up to 200 different types of mineral can host rare earths, the very large majority of which have never had a process, let alone a commercial process, for the extraction of the contained rare earths. The two most ‘conventional’ rare earth host minerals are bastnaesite and monazite with the flow sheet for the monazite having been established for decades and is widely available. The primary host mineral at Zandkopsdrift is monazite and so the challenge for Frontier will be to adapt and optimise this established flow sheet for the recovery of rare earths from the Zandkopsdrift deposit.

Which rare earth elements, in your opinion, are key to Frontier’s economic model and why?

I think that one has to look at the ‘balance’ in any rare earth deposit as all rare earth elements will be recovered together and then sequentially separated and sold. Clearly some rare earths such as cerium and lanthanum are relatively plentiful and as such I think that the medium term price is likely to be considerably below current price levels. Similarly we believe that five of the ten heavy rare earths are of very low or limited value due to the small size of the global market. We are very fortunate in that the Zandkopsdrift deposit has elevated levels of what we call the ‘Big Five’ namely neodymium and praseodymium of the light rare earths and europium, terbium and dysprosium of the heavy rare earths. I think that these five elements exhibit the most attractive supply/demand price outlook and will be key to Frontier’s economic model

Infrastructure is always a key component when putting a mine into production, please tell our readers about what is available in the area?

Our Zandkopsdrift development is located approximately 450km north of Cape Town, just off the N7 Highway in the Namaqualand region. Namaqualand is South Africa’s oldest mining province with over 150 years of gold, copper, base metals and diamond mining history. Although certain of these mines are no longer operational, there remains very good infrastructure, qualified staff and mining support services in the area. Of particular significance is the town of Bitterfontein which lies 30km from Zandkopsdrift and is the site of the nearest railhead and Saldahna Bay some 250km to the south and which is one of Southern Africa’s deepest water ports. The most capital intensive and complex part of the rare earth recovery process will be the separation stage and Frontier plans to construct a 20,000 tonne rare earth separation plant at Saldahna Bay proximate to other comparable plants and facilities. This is expected to significantly reduce Frontier capital expenditure requirement and development lead time.

What is the environmental permitting process like in South Africa and can you speak to the environmental part of the equation?

South Africa has a well-developed exploration, development and mine permitting regime. As part of the advancement of Zandkopsdrift Frontier will be required to do extensive assessment of the impacts of our current and proposed activities on, for example, the flora, fauna, wildlife, water resources of the area. Zandkopsdrift is not an area of particular environmental or other sensitivity and Frontier expects that the findings of its environmental studies will not impede the permitting and development of Zandkopsdrift. Of particular importance in the rare earth sector is the presence of the radioactive elements, specifically, of thorium (178 ppm at Zandkopsdrift) and uranium (56ppm at Zandkopsdrift) which fortunately are considered to be at very low levels in both absolute and relative terms at Zandkopsdrift.

Having completed your IPO, now that the dust has settled, what is on the horizon for Frontier Rare Earth and what key milestones do you hope to accomplish with the money you just raised?

We have a very busy 18 month program which will involve the completion of a Preliminary Economic Assessment due at the end Q3/early Q4 2011, with a Prefeasibility Study scheduled to follow 3-4 months thereafter and a Definitive Feasibility Study in Q4 2012. This work is fully funded with the proceeds of our IPO competed late last year. In addition we expect to investigate the some 30 satellite intrusions we have identified around Zandkopsdrift as well as initiating a regional scale exploration elsewhere in the Zandkopsdrift permit area.

This interview appeared in 5 Most Interesting Rare Earth Stocks – Part 1CLICK HERE for the article.

Mike Luft

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