Jon Hykawy: Offtake Agreements Rule REE Market

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August 4, 2011 (Investorideas.com Newswire) - End-users are emerging as key players in the rare earth space. In this exclusive interview with The Critical Metals Report, Jon Hykawy, head of Global Research with Toronto-based Byron Capital, shares his views on where this trend is headed and what it means for REE producers who don't have offtake agreements in place.

The Critical Metals Report: End-users are entering the primary rare earth elements market to secure future supplies of rare earth elements (REEs). Recently, state-owned Korea Resource Corp, KORES, proposed the purchase of up to 10% of Frontier Rare Earths Limited (TSX:FRO) and up to 20% of Frontier's Zandkopsdrift mine in South Africa. Should investors follow the big bucks flowing from these end-users?

Jon Hykawy: Yes and no. We are seeing much the same thing shaking up REEs that we saw in lithium. The people most interested in securing supplies are starting to learn about the market, but they are not necessarily completely educated regarding the market, not yet. We have a Speculative Buy recommendation on Frontier and a CAD$4.80 price target. So, we think KORES made a reasonable choice.

TCMR: Are these agreements becoming "must haves" in the junior REE sector? Is the market starting to discount companies without offtake or ownership agreements?

JH: Last year, anyone who claimed to have REEs was headed for glory and success. This year, the investment community—certainly the institutional investors—seems to recognize that there is no point in these companies building a mine if they can't get into production quickly or if they don't have a customer.

TCMR: China controls close to 98% of the REE market and has quotas on terbium and dysprosium. If China decides to flood the market with heavy rare earth elements (HREEs), wouldn't that throw the internal rate of return calculations and the bankable feasibility studies right out the window?

JH: You're probably right. However, the Chinese quotas don't differentiate among different types of REEs. The quotas allocate a certain number of tons to a certain number of companies. As far as the quota system is concerned, it doesn't matter what they export.

It's as if a storeowner decided to sell only 300 products a day. If you came to buy a loaf of bread, you would be competing against the store trying to push out the 300 steaks it's allowed to sell. The price of your loaf of bread just rose dramatically.

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