EDITOR: | November 21st, 2013 | 1 Comment

Korea at the Frontier: How One Country’s Quest for REE Sustainability Leads Past Milton Freidman – and to South Africa

| November 21, 2013 | 1 Comment
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Issues of the moment come and go, often obscuring the massive, tectonic shifts that will shape the world through the middle of the 21st Century and beyond. Case in point: The migration of more than 2 billion people in China and India into middle-class lifestyles – followed by the “Next 11” nations, home to another 4.5 million aspiring consumers. This shift – historical in scope – will touch off a scramble for resources of all sorts, the “inputs” of modern life, from energy and food to hard-rock resources like the Rare Earths and many more.

milton-friedman-300x202In the U.S. and elsewhere in what we used to call “the West,” a post-Cold War consensus has formed around the concept of free markets on a global scale: Demand for any item – for oil, metals and minerals as well as air-conditioners, automobiles, flat-screen TVs or smart phones – will be met by a global free market oblivious to national boundaries. Communism has fallen, and our new deity, Milton Friedman, now rules in its stead.

Take Friedman’s birthplace, the U.S., where even a gridlocked and dysfunctional domestic political class finds remarkable agreement on the efficacy of free trade. In this view, the messy realm of politics does nothing more than distort economic efficiency of a global marketplace. Of course, even as the commitment to fully free trade is often honored in the breach – the fact remains that, reinforced by the Solyndra debacle, there is widespread agreement that the U.S. Government has no place pursuing an industrial policy that “picks winners and losers.”

But not every nation subscribes to the capitalist catechism line and verse. Some suspect that national differences – and nationalistic frictions – will intrude on the textbook version of free trade.

Consider Korea – the world’s 15th largest economy with the 26th largest population, proof that the East Asian nation punches well above its weight in the global marketplace.

Unlike the U.S., South Korea is unencumbered by doubts about the propriety of industrial policy. They’ve been blasted away by the country’s lack of REE (and many other hard-rock) resources. With a decidedly high-tech economy and a rigorously educated workforce, Korea’s nightmare is the lack of material “inputs.” Like Nebuchadnezzar’s feet of clay, Korea’s concern is that its entire economic edifice rests upon feet of Neodymium (or Dysprosium, Terbium, Yttrium…).

For the sake of survival, Korean state agencies are scouring the world for significant sources of REEs. KORES – the government-run Korea Resources Corporation – singled out Frontier Rare Earth’s Zandkopsdrift project in South Africa for strategic partnership. At full production, Zandkopsdrift will add a Molycorp- or Lynas-sized 20,000 tpa to global REE supply – with one important caveat: A stronger showing of high-demand Middle and Heavy Rare Earths that seem to be headed into shortfall.

In late 2012, KORES paid $23.8 million for a 10% stake in Frontier, with the right to scale up to 50% ownership plus offtake agreements for 50% of production. Do the math, and KORES’ valuation put Frontier’s market cap at $238 million. With the company’s market cap today at $34 million – while the company has $36 million in cash-on-hand – it’s fair to ask, what does KORES know that the markets don’t?

And as for that long-running American debate between picking winners and losers, Korea is like the tout who wants to win so badly he puts a buck on every horse in the race.

In addition to KORES’ investment in Frontier, Korea’s PPS – the nation’s Public Procurement Service — has more than tripled its stockpiling targets for 30 metals and minerals, spending in excess of $500 million a year buying material for its resource bank. That’s the equivalent of the U.S. spending $7.5 billion a year replenishing its National Defense Stockpile. Don’t bother looking for a line-item that size in the U.S. defense budget. There isn’t one.

Beyond KORES and PPS, just this week, Korea’s Samsung has allocated $1.4 billion in a ten-year challenge to substitute other materials for Rare Earths in key technology applications – more evidence of the coordination between industry and government policy where resource security is concerned.

Use less, stockpile more – and incubate new non-Chinese suppliers. Korea’s policy is an “all of the above” approach aimed at one goal only: To never experience what it’s like to have essential resources withheld by a hostile power.

In contrast to resource-rich nations like the U.S., Canada and Australia, Korea is under no illusion that it can source its own metal needs from its own territory. Necessity is the Mother of Investment – and it may push Frontier’s Zandkopsdrift to the front of the line in the quest to add new sources of Rare Earths outside of China.


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Comments

  • Dave G.

    Interesting article. I follow Frontier Rare Earths and have a lot of respect for management….definitely a company to keep an eye on. The rest of the world could learn from Korea on this front. Good article Dan, I am really enjoying your perspective.

    November 25, 2013 - 3:22 PM

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