Hudson Resources is steaming ahead in the exploration and development of the Sarfartoq rare earths project, located on Greenland's Arctic Circle, some 20km from tidewater, 60 km from Greenland’s international airport and 15km from a proposed site for a hydroelectric power plant. It is just two and a half years since Hudson began exploring for rare earths on the carbonatite complex, and already one of the five targets is at an advanced stage with an inferred resource of 212,000 tonnes of contained TREO (total rare earth oxide) including 40M kg of neodymium, a key component in permanent magnets. During those two years the price of the metal has soared fifteen-fold, from under $20/kg in 2009 to around $330/kg today, an indication of the market's perception of the positive supply/demand fundamentals for the metal.
The company, which recently raised C$17M, is hoping that future progress will also be speedy, assisted by the streamlined permitting process in Greenland and by the relatively straightforward metallurgy of the deposit; early indications are that it has strong similarities to other carbonatite deposits such as Molycorp's Mountain Pass. Hudson has just commissioned Wardrop to undertake the Preliminary Economic Assessment, which should be complete by the fall, paving the way for the start of the pre-feasibility study by the end of the year.
Meanwhile Hudson's current market capitalisation, at C$83M, is one of the lowest of the fifteen or so advanced rare earth companies in the Bloomberg Rare Earths Index. There is a school of thought which argues that the company is undervalued relative to its rock values and metallurgy, with the market currently placing unwarranted emphasis on the presence of heavy rare earths in the rare earth mix of each deposit. A recent research report by Dahlman Rose rated the company as a buy, with a target valuation at a 20% discount rate of C$1.60 per share, compared with the current price of C$1.03. If a 16% discount rate is assumed then the valuation jumps to $3.80 per share.
The Sarfartoq Project
Hudson was formed in 2000 when a number of companies were turning their eyes to Greenland following the discovery of several significant diamond kimberlites and the massive Voisey Bay nickel-copper-cobalt deposit in the Canadian Arctic. Like other Greenland-bound companies Hudson was attracted by its geological prospectivity, political stability, excellent mineral tenure regulations, an extensive publicly-available database of previous exploration results, and a lack of native claim issues.
In 2003 the company formed a JV with New Millennium (NMR) to earn diamond rights on the Sarfartoq exploration licence. Over the following years it accumulated 100%-owned licences over 1699 square kilometres in the area (think the size of Greater London, or one and a half times Metro Vancouver). Sarfartoq had previously been explored by a number of majors for diamonds, while the discovery of the Sarfartoq Carbonatite Complex by the Danish Geological Survey in 1976 had precipitated waves of exploration for niobium and tantalum by Hecla, NMR and others.
Nonetheless Hudson was totally diamond-focussed until 2008. Each year it recovered ever larger diamonds, finding the largest stones ever recovered in Greenland. In early 2009 the Greenland Bureau of Minerals and Petroleum (BMP) gave its first ever Prospector and Developer award to Hudson for "extraordinary effort in the geological exploration of Greenland".
By this time however the diamond market had collapsed along with the world economy. It proved impossible to raise further finance for diamond exploration. Hudson decided therefore to investigate the rare earth, niobium and tantalum potential of the 12 x 8km carbonatite complex which lay wholly within its project area. The company was particularly attracted by the increasingly positive fundamentals of the rare earths market with its outlook of rapidly growing demand but constrained and China-dominated supply.
Hudson acquired extensive past exploration data from NMR enabling it to design a modest prospecting programme in 2009 which revealed the potential for extensive rare earth mineralisation in the complex with an exceptional neodymium content. Indeed the early samples - and this in the days pre-rare earth mania when neodymium was less than $20/kg compared with $300+/kg today – suggested that the rock values could be $500/tonne compared with $100/tonne at the time for diamonds.
In 2010 therefore the REE exploration programme was expanded enabling Hudson to identify five target zones around the outer ring of the carbonatite (ST1, ST19, ST24, ST31 and ST40), and to publish an NI43-101 resource for the ST1 zone in early 2011; 14.1M tonnes at 1.51% and thus 212,000 tonnes of contained TREO (at a 0.8% cut-off). The speed at which this resource was published, the fact that it is just one of five potential targets and that it remains open in all directions is perhaps testament to the upside potential for the size of the project.
Of course the size and grade of a rare earths deposit is only part of the story. Other issues include (i) the distribution of the rare earths within the TREO mix, (ii) the metallurgy of the deposit and the ease or otherwise with which the rare earths can be liberated from the host minerals and the extent to which there are deleterious minerals, (iii) the location and infrastructure of the project and the jurisdiction in which it operates, (iv) the potential for future expansion, and, (v) the ability of the management team to develop the project. On all counts there is, arguably, reason to be positive about Hudson's project:
(i) The TREO mix at Sarfartoq is rich in neodymium which has a highly positive supply/demand outlook : The seventeen rare earths are always found together in a deposit but in varying proportions. At 19% neodymium oxide the ST1 resource at Sarfartoq has one of the highest proportions of neodymium of any of the NI43-101/JORC compliant rare earth resources. Exploration results from other targets at Sarfartoq have produced even higher results, including an assay of 46% NdO2 from the ST40 zone.
The abundance of neodymium is good news for Hudson as the metal is a vital component in NdFeB permanent magnets. These are the most powerful permanent magnets known and have many uses, from hard disks, Blackberries and Ipods through to hybrid cars, aircraft and wind turbines. Demand forecasts are high, demand is considered relatively inelastic to price as the proportion of the neodymium component in the cost of the final product is small and there are no substitutes.
Supply meanwhile is low and even though there will be increases in the future as new rare earth projects come on stream the metal has been identified by the US Department of Energy as being critical in the medium and long term. James Tuer, President of Hudson, takes the view that potential demand for neodymium will only be limited by supply. Certainly the price has rocketed in recent years, from $19/kg in 2009 to $100/kg by the beginning of 2011 to $330/kg today. At current prices therefore Hudson's 40M kg of neodymium oxide in its ST1 resource has an in situ value of $13B.
(ii) The metallurgy of the deposit appears relatively straightforward: Each rare earth orebody is unique so a separation process has to be developed for each deposit. Metallurgy is therefore always key in rare earth projects, significant impacting on development time, capex and opex. Fortunately for Hudson the metallurgy of Sarfartoq appears relatively straightforward, similar to that of Molycorp's Mountain Pass which has a demonstrated commercial process.
Rare earths are almost always found with uranium and thorium. At Sarfartoq the thorium concentration is low (about 500ppm), though its radiometric signature is an effective prospecting tool for identifying additional REE occurrences. Uranium is present but only in a very low concentration (about 5ppm or 0.0005%). Since Greenland has a moratorium on uranium exploration Hudson recognise that the uranium content is a cost but a manageable one.
(iii) The project location and infrastructure are favourable given the importance of shipping and power in operating costs. The proposed Alcoa smelter and HEP plant could provide a boost to project economics. Greenland's one-stop permitting process could expedite development.
Sarfartoq is 60km and a twenty minute helicopter ride from Kangerlussuaq international airport, Greenland's most important transport hub. It is 15-20km from deep water shipping.
Power is currently generated locally using diesel and gasoline shipped in by barge. However Alcoa is seeking to build an aluminium smelter nearby, attracted by the competitive energy costs, the strategic location between Europe and N. America, and the suitability of the rugged terrain for HEP. A feasibility study is underway. If successful the project would represent one of the largest investments in Greenland's history involving the development of a 600MW HEP plant within 15km of Sarfartoq as well as harbours, camps, roads and heliports. Hudson has held preliminary discussions to ensure access to this power source if constructed. If not then Hudson still has the option to use the height differences on its property to generate hydro power.
Hudson has established a strong working relationship with the BMP, the one-stop government agency responsible for permitting and mining regulation. Greenland is seeking to develop alternative sectors to fishing in order to develop the economy and create employment. It was included in the Fraser Institute Survey of Mining Companies for the first time this year ranking the 12th most favourable jurisdiction for mining out of 79.
(iv) There is significant potential for expansion. The Sarfartoq carbonatite complex is large and Hudson has already identified four other exploration targets around the outer ring besides the ST1 resource which remains open in all directions. Exploration highlights to date include intercepts of 60m at 2.6% TREO and 14m of 4.9% on ST19, and an assay with the industry's highest known ratio of neodymium oxide to TREO at 46% on ST40.
(v) The management team has been selected with complementary skills to understand each facet of the operation. The team has considerable experience in rare earths, in Greenland and in each stage of the development process.
Work Program: 2011 and beyond
Hudson published its resource estimate on ST1 in January. In April it closed a C$17.3M financing and was the only exploration company invited to present on rare earths to the European Parliament.
Now the company is following a two-pronged strategy; to develop a full mining operation at ST1 while maintaining its exploration efforts on the other four target zones. It began a 10,000 metre drilling program in May of which about half will be on ST1 to upgrade the resource from inferred to indicated. Meanwhile an environmental assessment has begun, metallurgical work is underway and the company has just awarded the contract for conducting a Preliminary Economic Assessment to Wardrop, based on their experience assessing other rare earth projects, and other development projects in Greenland.
If all goes well Hudson will begin the pre-feasibility by the end of this year and submit for an exploitation licence by the end of 2012. It currently has about C$17.5M in cash – enough to last two years.
Hudson's current market capitalisation, at C$83M, is one of the lowest of the advanced rare earth projects. James Tuer believes that this can be attributed in part to the current market obsession with "heavies vs lights". He notes that while heavy rare earths (the metals with atomic numbers 63-72) have higher selling prices than the lights they tend to be found in deposits with lower grades and are more costly to extract. He believes that investors are only just beginning to wake up to the importance of rock values and metallurgy and that for the moment there is a disconnect between market capitalisation and rock value (see chart below), with investors rating carbonatites less highly than peralkaline deposits (which typically have a greater proportion of HREOs).
The investment bank Dahlman Rose recently initiated coverage on Hudson describing the company as an "attractive trading vehicle to capture upward price movements in rare earth element prices and a potential takeover target over the medium-term". Positives noted in Dahlman's report of May 2011 included the neodymium rich deposit, (and thus leverage to the "rare earth element with the most attractive supply/demand balance"), the potential for significant additional resources, the straightforward metallurgy of the deposit and the potential from the diamond assets on the project either to be developed in a JV or to be monetised.
Meanwhile risks noted included possible changes in the market for rare earth elements, development delays, risks from environmental regulation and the need for additional financing which may not be forthcoming. However Dahlman rated the company as a buy with the initial valuation at a 20% discount rate of C$1.60 per share (compared with C$1.03 today), based on 20 years production of TREO at a rate of 10,000tpa beginning in 2017. If the discount rate is reduced to 16% the valuation per share jumps to $3.80 while at 12% it is $7.85.
There is still a long way to go before Hudson can be in production. In the meantime the company has a world-class deposit, is operating in a favourable jurisdiction, and has made a good start at lining up its ducks in a row.
Key milestones to watch in the next year or so are the metallurgical results, (Is the metallurgy going to work? Can the company produce an economic end product?), the results from the Preliminary Economic Assessment and, later, the Pre-Feasibility, and the conversion of the exploration permit to an exploitation permit.