Rare Earth Stock Poised to Make a Run

September 13, 2010

Matthew B. Smith

The world has finally awoken to the dire situation it faces with the shrinking supply of rare earths with no quick, easy fixes to boost production in the immediate near-term.  It is a daunting task indeed for countries such as the United States and its European brethren who figured they would be able to build tomorrow’s devices with yesterday’s low rare earth prices.  Ironically, tomorrow’s energy plans for the wind turbines and electric cars to create ‘green energy economies’ could simply turn out to be a pipe dream as China appears more and more reluctant to export their rare earths abroad at any price. 

It has always been our view of the world that from time to time certain situations tilt from one extreme to another, generally spending the majority of the time somewhere in between.  Over the last decade or two America has exported its idea of free trade and capitalism, creating harsh competition among producers which drove down prices as everything became streamlined.  Now China is assuming its rightful place among the world’s leading economies and is doing what all the previous world powers did to assume their massive power, assembling supply of resources to fuel their future growth.  In the past, the British used their colonies to supply them with the necessary resources, America was blessed with everything needed within their massive landmass until after the second world war when growth really exploded.  Going further back even the Romans imported the resources they needed to expand their economy, using massive road networks and aqueducts to get what they needed.

This brings us to our main point, in the next few years, as rare earths are understood to be the key to future technology and regarded as a necessity to fuel future economic growth as well as build the defense systems needed to protect that economy, economics of projects will matter less and less.  It is our opinion that countries will want to have production to build stockpiles, much like the period that existed prior to globalization and free trade created the just-in-time delivery system which enabled most to liquidate their strategic stockpiles.  Our guess is that countries will provide cheap financing or grant funding in order to get these resources to their manufacturing sectors, not to mention that a mine is an excellent provider of well paying jobs.  Another idea is that we could see European countries along with America and Canada changing laws in order to accommodate these projects for their valuable production, which could be a trend already started.

North America has many companies with promising REE projects, Europe much less so.  Obviously Greenland has Greenland Minerals & Energy with their massive rare earths and uranium project and Sweden has Tasman Metals with their Norra Karr project, but after that the project pipeline is pretty thin.  The company we view as the most undervalued in the entire European sector, as far as those who actually have drill results confirming mineralization on their properties but no calculated resource yet, is Hudson Resources Ltd. (HUD – Toronto Venture, HUDRF – OTC).  The stock has languished due to concerns about the Greenland government not allowing Greenland Minerals and Energy to mine their project due to the radioactive by-product that would be present, uranium.  This past week the government of Greenland announced that GGG could proceed with the development of their project through the feasibility phase of the project.  The country will make its decisions on a project-by-project basis, but in our opinion Hudson’s Sarfartoq project is less of a risk of getting the ax than was Greenland’s. 

Across the rare earth spectrum many of the stocks are now at 52-week highs having either recently set them or run right back up to where they had been.  Hudson however has been a languisher.  In our opinion Hudson presents the most compelling value play among those currently drilling and trying to prove up an economical resource.  The stock is trading 55% off of its 52-week high of C$1.67 set back on December 31, 2009.  The Greenland government’s decision sent the shares up 19%, but if one looks around the industry, it would be hard to find a more undervalued company on the same level as Hudson. 

The drilling results for Hudson have been quite impressive with the company reporting Quest-like drill intercepts.  For the 2010 drilling campaign the company has already finished and reported Phase I, and Phase II started on August 17.  Phase II, according to the company, should, “include approximately 2,000m of drilling on existing and new targets.” 

The company’s ST1 Zone at this point has the best chance of making Sarfartoq the company maker that we think it is.  The area has returned monster intersections with drill holes SAR09-04, SAR09-05, SAR10-08, SAR10-13, SAR10-15, SAR10-16 and SAR10-17 all returning over 100m of 1% TREO or better, with SAR10-08 and SAR10-13 reporting over 300m of those intersection grades.  The company reported in its August 12^th press release that they have a high distribution of neodymium which averages 20% of TREO in the drill intercepts at the ST1 Zone to date, with additional significant niobium (up to 0.56% Nb205).

This project is huge in scale and the company has drill tested two other sections, ST40 and ST19.  The potential exists where mineralization could exist between the ST1 Zone and the ST40 Zone according to one of the company’s consulting geologists.

Metallurgical work will also commence in the last quarter of 2010, and those results should give investors a better idea of what they are working with.  Also of interest to investors is that the project is near infrastructure currently in place, or that will be in place within the next few years.  This infrastructure would have the potential to significantly drive down the costs of any future production should the company’s continued exploration efforts prove up a large resource.

From our analysis of the company and its prospects we believe from these levels that the company could see an increase in its near-term share price of 50%.  Positive drill results or newfound support and/or sponsorship in the investment community could push shares higher than this estimate.  With Greenland’s new ruling on atomic by-products Hudson Resources is a company that could catch many investors’ attention in the months ahead.