FRONTIER RARE EARTHS LIMITED SA 
By • Kores option to increase its participation up to a 50% or equal interest with Frontier in Zandkopsdrift (see note 1), together with an off-take right and obligation for up to 50% of production from Zandkopsdrift
• Kores to arrange project finance for entire Zandkopsdrift development on best available market terms
• Kores to provide pro rata funding for the portion of Zandkopsdrift development costs not covered by the project finance• Kores to provide technical and operating experience for the design, construction and operation of Zandkopsdrift facilities
• Frontier and Kores to cooperate in relation to downstream opportunities in the area of rare earth metals, alloys and magnets
James Kenny, President and CEO of Frontier Rare Earths commented: "We believe that the agreement reached with Kores to significantly expand our current joint venture arrangements is a strong vote of confidence in both the potential of the Zandkopsdrift project and the management of Frontier. We have developed an excellent working relationship with Kores over the past 12 months, and have a very high regard for their management team, organisation and capabilities. Working together with Kores we believe that Frontier will be very well placed to meet our objective of becoming the next major producer of separated rare earths outside of China." Background
Following the signing in December 2011 of a definitive
strategic partnership agreement between Frontier and Kores
(the "Strategic Agreement") Kores acquired an initial 10%
interest in Zandkopsdrift, along with an off-take right and
obligation for 10% of rare earth production from
Zandkopsdrift for a cash consideration of C$23.8m. Payment
for this initial 10% interest is due on November 30,
2012.
As previously announced, in August 2012 Kores approached
Frontier with a proposal to significantly increase its
potential interest in Zandkopsdrift. Following extensive
negotiations Frontier and Kores have now reached agreement
(the "Revised Strategic Agreement") to amend the terms and
significantly broaden the scope of the Strategic Agreement.
Subject to Kores arranging project finance for the capital
costs of construction and development of the proposed mining
and processing operations at Zandkopsdrift and committing to
provide its pro rata share of the portion of capital costs
not covered by such project finance, Kores, under the terms
of the Revised Strategic Agreement, will have the right to
increase its interest in Zandkopsdrift up to
50% (see note 1 below), and become an equal partner with
Frontier in Zandkopsdrift, providing it with an off-take
right and obligation for up to 50% of rare earth production
from Zandkopsdrift.
Kores acquisition of further interest in Zandkopsdrift to become equal partners with Frontier
Kores will have the right to acquire an additional interest
in Zandkopsdrift (the "Equal Partnership Option") following
the filing by Frontier of a NI 43-101 compliant report
containing the results of a positive Definitive Feasibility
Study on Zandkopsdrift (the "DFS Report") currently scheduled
for Q4
2013. Following the exercise of this option, Kores would,
subject to the satisfaction by it of the conditions of the
Equal Partnership Option, as set out below, acquire the same
shareholding in Zandkopsdrift as Frontier (see further
details in note 1). The key provisions and conditions of the
Equal Partnership Option are as follows:
Kores to arrange project finance
Kores will be obliged to arrange a finance commitment(s) from lenders to provide project finance to cover the capital costs for the construction and development of the proposed mining and processing operations at Zandkopsdrift, including the design, procurement, construction and commissioning of all required plant, machinery and equipment (the "Project Finance Commitment"). Frontier may, in its absolute discretion, accept or reject the Project Finance Commitment. In the event that the Project Finance Commitment is rejected by Frontier the Equal Partnership Option shall be terminated.
Kores to provide a pro-rata funding commitment
Kores will be obliged to provide Frontier with an irrevocable commitment to provide its pro- rata share of Zandkopsdrift capital costs not covered by the Project Finance Commitment.
Consideration based on market value of Zandkopsdrift
The consideration payable by Kores under the Equal
Partnership Option will be based on the implied market value
(the "IMV") of Zandkopsdrift and will be payable to Frontier
in cash. The IMV will be based on Frontier's enterprise value
("EV"), calculated as market capitalisation less cash and
cash equivalents, adjusted for Frontier's shareholdings in
the various entities comprising Zandkopsdrift, calculated as
per Notes 1 and 2, below.
The EV for the Equal Partnership Option will be based on the
average of (i) Frontier's volume weighted average share price
("VWAP") for the seven trading days following the
notification by Kores to Frontier that it intends to exercise
the Equal Partnership Option, and (ii) the VWAP for the seven
trading days following acceptance by Frontier of the Project
Finance Commitment as arranged by Kores. Kores will remain
obliged to contribute to all costs
related to the development and operation of Zandkopsdrift
pro-rata to its interest in
Zandkopsdrift from time to time.
Acquisition of further 10% interest in Zandkopsdrift and 10% interest in Frontier
As an alternative to the Equal Partnership Option, Kores will have the right to acquire a further 10% interest in Zandkopsdrift following the filing of the DFS Report (the "10% Option"). The consideration payable by Kores for the 10% Option will be based on the discounted cash flow valuation of Zandkopsdrift as set out in the DFS Report and will be payable to Frontier in cash. Subject to the acquisition by Kores of this additional 10% interest in Zandkopsdrift, Kores will then be entitled to subscribe for up to a 10% shareholding in Frontier, based on the prevailing market price for Frontier's shares on the Toronto Stock Exchange at that time.
Alternative Strategic Investor
In the event that an alternative strategic investor ("ASI") acquires a 20% interest or more in Zandkopsdrift or, in certain limited circumstances, a 20% interest or more in Frontier, prior to the exercise by Kores of the Equal Partnership Option or the 10% Option, the Equal Partnership Option will terminate and be replaced by an option under which Kores can acquire a further 10% interest in Zandkopsdrift (the "ASI Option") for a consideration calculated on an IMV basis. The ASI option will be available to Kores as an alternative to the 10% Option and under no circumstances in addition to the 10% Option. The EV for the purposes of the ASI Option will be calculated on a similar basis to the Equal Partnership Option, except that the VWAP calculation will be based on the 15 trading days immediately after the public announcement that an ASI acquisition has taken place.
Off-take
Kores will enter into a definitive off-take agreement with Frontier under which it will have the right and obligation to purchase a share of rare earth production from Zandkopsdrift proportionate to its direct interest in Zandkopsdrift from time to time, as follows:
• Off-take of 50% of Zandkopsdrift rare earth production if Kores exercises the Equal
Partnership Option.
• Off-take of 31% of Zandkopsdrift rare earth production if Kores acquires an additional 10%
interest in Zandkopsdrift and a 10% interest in Frontier
• Off-take of 10% of Zandkopsdrift rare earth production if Kores only holds the 10% interest in Zandkopsdrift that has already been acquired and does not exercise any further options under the Revised Strategic Agreement.
All of the rare earth production to be purchased by the Kores under the off-take agreement will be on a take-or-pay basis and based on prevailing international rare earth market prices at the time of purchase. Frontier will have full flexibility to seek other customers/partners for the balance of rare earth production.
Other Key Terms
The other key terms of the Strategic Agreement remain
unchanged under the Revised Strategic
Agreement, and are summarised below:
Acquisition of initial 10% interest in Zandkopsdrift
The terms for the 10% interest in Zandkopsdrift that has been
acquired by Kores and off-take rights for 10% of rare earth
production are unchanged, with payment of the purchase price
of C$23.8m
due on 30 November 2012. Since July 3 2012 Kores has been and
continues to be responsible for a
10% share of all operating costs and expenses related to
Zandkopsdrift.
Technical and Operating Assistance
Kores will provide such technical, operating and other assistance relating to the design, planning, construction and operation of a rare earth mining and processing operation at Zandkopsdrift as may be agreed between Frontier and Kores.
Downstream Opportunities
Frontier and Kores will investigate and jointly pursue rare earth related downstream business opportunities including, but not limited to, rare earth metals, alloys, magnets and other rare earth related products.
Notes:1. For the purposes of the Revised Strategic Agreement, the "Zandkopsdrift project", or "Zandkopsdrift", is comprised of the following subsidiaries of Frontier (collectively the "Frontier Subsidiaries"):
a. Sedex Minerals (Pty) Limited "Sedex", which holds the prospecting right for the
Zandkopsdrift deposit in the Northern Cape Province of South Africa;
b. Frontier Separation (Pty) Limited "Sepco", which will finance build and operate the rare earths separation plant at Saldanha Bay in the Western Cape Province of South Africa; and
c. Frontier's rare earth sales and trading operation "Tradeco", which will own and market the rare earth production from Sepco.
The entitlements of Kores to shareholdings in the Frontier Subsidiaries, and its potential future entitlements under the various options in the Revised Strategic Agreement, are as follows:
Sedex | Sepco | Tradeco | |
Current | Frontier - 64% Kores - 10% Black empowerment partners - 26% | Frontier - 90% Kores - 10% | Frontier - 90% Kores - 10% |
Equal Partnership Option | Frontier - 37% Kores - 37% Black empowerment partners - 26% | Frontier - 50% Kores - 50% | Frontier - 50% Kores - 50% |
10% Option | Frontier - 54% Kores - 20% Black empowerment partners - 26% | Frontier - 80% Kores - 20% | Frontier - 80% Kores - 20% |
ASI Option | Frontier - 54% Kores - 20% Black empowerment partners - 26% | Frontier - 80% Kores - 20% | Frontier - 80% Kores - 20% |
2. The implied market value ("IMV") of Zandkopsdrift will be calculated on the following basis:
a. The Frontier Enterprise Value ("EV") is calculated as market capitalisation ("MC") less cash
and cash equivalents. MC is calculated as total shares in issue multiplied by the VWAP for the specified period.
b. Each of the Frontier Subsidiaries is attributed with a portion of the Frontier EV pro-rata to the contribution of the relevant subsidiary to the discounted cash flow valuation as contained in the DFS Report.
c. The IMV of each of the Frontier Subsidiaries is calculated by dividing the EV attributed to the relevant subsidiary under Note 2b, above, by Frontier's shareholding in that subsidiary.
For further information on Frontier visit www.frontierrareearths.com,
e-mail the Company at IR@frontierrareearths.com or contact
+352 208 80249. In North America contact Joe Racanelli, TMX
Equicom, at 416 815 0700 x243. For further information on
Kores visit www.Kores.or.kr.
About Frontier Rare Earths Limited (TSX: FRO): Frontier Rare
Earths Limited (www.frontierrareearths.com)
is a mineral exploration and development company principally
focused on the development of rare earths projects in Africa.
Frontier's flagship asset is the Zandkopsdrift rare earth
project, which is located in the Northern Cape Province of
South Africa and is one of the largest, highest grade
undeveloped rare earth deposits worldwide. Frontier has a
direct
64% interest and a 85% economic interest in Zandkopsdrift
following the acquisition by KORES of an initial 10%
interest. In March 2012 Frontier filed a Preliminary Economic
Assessment ("PEA") on the Zandkopsdrift project prepared in
accordance with National Instrument 43-101. The results of
the PEA indicate that the proposed development of the
Zandkopsdrift Project is both technically feasible and
economically robust with a low risk profile. In conjunction
with the PEA a mineral resource estimate for Zandkopsdrift
confirmed 42.5m tonnes at an average grade of 2.23%
containing approximately 940,000 tonnes total rare earth
oxides (applying a 1% cut-off) and with 78% of the mineral
resource in the indicated category. Mineral resources that
are not mineral reserves do not have demonstrated economic
viability. Fiona Harper, Pr.Sci.Nat, was the independent
qualified person from Venmyn Rand (Pty) Ltd responsible for
the PEA.
Frontier is listed on the main board of the Toronto Stock
Exchange and currently has 89,562,781 shares outstanding.
Frontier is well funded, with approximately $28m cash
(excluding the $23.8m to be received from Kores under the
Strategic Agreement) and no debt, and this strong working
capital position is expected to be sufficient to finance the
proposed work programme of the Company and the completion of
a Preliminary Feasibility Study and a Definitive Feasibility
Study for Zandkopsdrift (scheduled for completion in Q4
2013).
relationships, anticipated trends and challenges in the
Company regarding competition; mineral resource estimates and
supply outlook and growth opportunities, the future price of
and future demand for rare earth elements, title disputes or
claims including Black Economic Empowerment initiatives, and
the timing and possible outcome of pending regulatory and
permitting matters.
Readers are cautioned that the assumptions used in the
preparation of such information, although considered
reasonable at the time of preparation, may prove to be
imprecise and, as such, undue reliance should not be placed
on forward-looking statements. There can be no assurance that
the plans, intentions or expectations upon which these
forward-looking statements are based will occur. The
forward-looking statements contained herein are made as of
the date of this news release and are expressly qualified in
their entirety by this cautionary statement. Actual results
may differ materially from those anticipated. Readers are
cautioned not to put undue reliance on forward- looking
statements due to the inherent uncertainty therein. Frontier
disclaims any intent or obligation to update publicly any
forward-looking statements, whether as a result of new
information, future events or results or otherwise, except as
required by applicable law.
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