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T.FRO 19 cents & rare earths on CBS 60 minutes

Danny Deadlock Danny Deadlock, TickerTrax
8 Comments| March 27, 2015


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FRO.T Relevance to March 22nd Rare Earths story on CBS 60 Minutes

With $25 Million Cash Worth 28 cents per share, Frontier Rare Earth Ltd.'s (TSX: T.FRO, Stock Forum) (19 cents) (OTC: FREFF, Stock Forum) world class REE project and partnership with the Korean government is valued at ZERO by the market.


March 22nd CBS 60 Minutes did an excellent story on the potential crisis facing the rare earth industry - if you own any stock in this sector or had a previous interest in the industry, you will want to watch this.

In fact - if you use a tablet, Smartphone or technology in general (which is just about everyone) - you will want to watch this.

starts 13:15 ends 26:05

The story re-affirms what we have known for the past couple years (near crisis state of the rare earth industry) but 60 Minutes has a weekly audience of 17 million (primarily older men) and maybe this "wake up call" will be enough to drive renewed REE interest on Wall Street in 2015.

Click to enlarge

My own personal micro cap (penny stock) favorite in the industry is FRO because:

1) they trade below their $25M cash value so the project is valued at zero

2) it is one of the largest undeveloped REE projects in the world

3) it is one of the most well funded microcap REE's trading in Canada

4) they have a formal partnership with the Korean government.

Because they do not need to raise cheap capital, I don't mind following them longer term and tucking away the stock - in hopes more investors recognize the value of higher quality REE projects.

Frontier has a VERY small audience because the project is located in South Africa and the senior management team is based in Luxembourg, Capetown, and Shanghai. Unlike typical TSX or TSXV junior exploration companies, there is no one in Toronto or Vancouver to flog their story. And in the United States no one will even know they exist.

It will take a sustainable sector rally, a large financing, or a merger/takeover to realize big gains on this one. But I don't mind waiting that possibility out in 2015.

The only REE producer in North America is Molycorp Inc. (NYSE: MCP, Stock Forum) and while they have been around for decades (as you will see in the video), they are drowning in debt and may be bordering on bankruptcy. If they are taken out of the supply chain in the United States, you will see a lot of American focus on REE's because it will mean their entire military machine is now dependent upon China.

Click to enlarge

Rare earth (REE) stocks were explosive in 2010 and 2011 but until recently they were swept under the carpet and forgotten about. It is impossible to know if they will come alive again in 2015 because this is an industry that can turn on a dime.

On the chance we see a sustainable sector rally this year (driven off the world's insatiable demand for technology), we will be following FRO.T. There are only a handful of public REE companies in the world that are worth following (most listed in Canada) and the majority in this space are very early stage, broke and running on shoe-string budgets.

Molycorp (MCP.NYSE 45 cents) is the only producer in North America. They have a large mine south of Las Vegas but they also have MAJOR debt problems. The stock had been falling since 2012 when it hit $36 but it bottomed late January at 30 cents. In February it rallied 250% off that historical low.

As Molycorp rallied, so did several of the higher profile REE exploration companies in a matter of weeks.

They included:

QRM.T 120% / RES.T 280% / AVL.T 100% / REE.Z 260%

In March these stocks corrected from those highs but it became very clear there was strong pent-up investor demand and traders were quick to capitalize on the momentum because so many other junior exploration sectors are dead in the water.

While the REE sector rally was short lived, there is still good reason to keep a close eye on it (as the CBS 60 Minutes show explains, and for reasons I have noted below).

> Rare earth (REE) exports in China unexpectedly decreased sharply by 49% year-over-year to 1,457 tons in January of 2015

> The rare earth demand side is showing signs of recovery. In the wind power sector (a large consumer of magnet based rare earths), China continued to drive global wind power growth, setting a new record in 2014 with 23,351 MW of new wind power, representing 45 percent of the global market

> For the first time ever, iPhone sales in China were greater than those in the developed world. A sign that demand for rare earths (critical to technology) will keep growing and China (largest producer) may begin to control exports and prices will rise in 2015.

> The world's rare earth production is controlled 87% by China - of that, six companies are the dominant supplier.

> Military conflicts around the world keep growing and REE's are critical to almost every aspect of military technology (including the turbines in a fighter jet or the guidance system in a missile).

> After bottoming in 2014 (and dragging the sector down for the past two years), the critical rare earths used in permanent magnets are beginning to rise. These include Terbium, Dysprosium, Praseodymium, and Neodymium.


Frontier Rare Earths (TSX:FRO 17 cents / OTC:FREFF)

> Shares Outstanding: 90 million

> Current Net Cash: $25 million or 28 cents per share

> Strategic partnership with the South Korean government through KORES

> 20,000 metres of historical drilling on large South African REE project

> Prefeasibility study is expected to be released by April

Click to enlarge

The initial 2012 preliminary economic assessment (PEA) showed ridiculously strong economics (very high cash-flow with a capital payback of two years) BUT rare earth prices were a lot higher in 2012 than they are now. For this reason, the upcoming Prefeasibility study is VERY important.

> The 2012 PEA showed the project with a discounted (11%) Net Present Value of $3.65 Billion

> Internal Rate of Return (IRR) of 52.5%

> Capital Cost of $910 Million with 2 year capital payback

> Mine life up to 45 years would "in theory" make it one of the largest REE projects outside China.

Their Zandkopsdrift rare earth project comprises an area of approximately 148,000 acres in the Northern Cape Province of South Africa. The project is 300km north of a deep water port and 35km to the nearest railhead.

Zandkopsdrift has been the subject of a number of geological, mineralogical and metallurgical investigations from the 1950s onwards. Most of the original prior work was carried out by Anglo American in two phases over a six-year period during the 1980s. Frontier acquired all that previous work including drilling, bulk sampling, metallurgical testing and related analyses.

Frontier has since completed the drilling of 313 boreholes for a total 21,037 meters and more than 19,000 individual chemical assays undertaken.

From the time the project was discovered in the 1950's until 2010, Rare Earth projects carried little value or interest.

Frontier's 64% owned subsidiary, Sedex, controls the project while 26% is owned by a South African Black Empowerment Group (as dictated by law). The other 10% is owned by the South Korean government through KORES.

In December 2012 KORES completed a $24 million investment in FRO for a 10% interest in Zandkopsdrift. At that time FRO then had $53 million in cash. Over the past two years they have spent $28 million in drilling, analysis and preparing the Prefeasibility study (release expected March or April).

The company released a new corporate presentation in January and it showed their cash position at $25 million - the end of September it was $28 million after minimal debt so it looks like the bulk of the money has now been spent on this important feasibility study.


Because the stock currently trades below cash value, their REE project is valued at Zero by the market.

After this new economic study is released, we would know what a realistic valuation is. If KORES is interested in taking a more serious interest in this project, we would likely see movement from them within three to six months of the study release.

Liquidity on FRO has been good the past month and that should continue near 20 cents. It makes sense that some shareholders who have been sitting on an idle investment through 2014 will want to sell whenever buying activity improves. It is likely a mistake for them to sell ahead of this prefeasibility study but some shareholders will simply want the cash.

The following website has a recent interview with the CEO. The person doing the interview is a bit "different" but the FRO CEO feedback is useful when combined with the video / animation on the bottom of the Frontier home page and/or the corporate presentation.

It is important to hold companies with advanced projects and strong balance sheets. Cash is king in this market and will remain critically important through 2015 as it is still very difficult to finance resource exploration.

READERS PLEASE NOTE: This report is available in PDF format - Click Here.


Disclosure: Danny Deadlock owns 100,000 shares of FRO purchased in 2015


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