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Spec Value Hunter Comment - November 13, 2009: Sarfartoq drill results confirm significicant LREE carbonatite system
 Hudson Resources Ltd released drill results on November 4, 2009 for its 9 hole 1,331 metre drill program on its 100% owned Sarfartoq project in Greenland which support the hypothesis that this large carbonatite complex has potential to host a sizable medium grade light rare earth resource. Unfortunately the three holes drilled into the ST40 radiometric anomaly, which had yielded an outcrop sample average grade of 3.1% TREO with a rock value of US $508 per tonne, failed to intersect any material approaching 3%. The highest grade interval was 0.8 metres of 2.32% TREO in hole #2 with a rock value of US $423/t (based on 4 year averages as of Feb 2009), and the best intersection was 10.22 metres of 1.36% TREO in hole #3 with a rock value of $246/t. The ST40 radiometric anomaly has dimensions of 1,000 m by 250 m, but the drilling and surface sampling was concentrated on a 125 m by 100 m "hotspot" within the anomaly. Pie charts for the REO distribution for the ST40 outcrop and core sample values are presented below.
On the plus side all three holes confirmed the neodymium weighted distribution we had observed in the outcrop sample and which was the basis for our Good Relative Spec Value Buy at $0.41 recommendation made on September 9, 2009. The mineralized host consists of an iron rich carbonatite dyke system, which in the area of the ST40 anomaly appears to have undergone multiple hydrothermal pulses. Drilling is insufficient to outline the geometry of the enriched dykes, so we cannot at this stage tell if the elevated neodymium values are just a local phenomenon with limited tonnage implications or part of something much bigger. Because the ST40 anomaly appears to be linked to the ST1 anomaly further drilling next year is justified. I am, however, disappointed that we did not get lengthy neodymium enriched high grade intervals in this first round of drilling.
I am, however, pleased with the results from the ST1 anomaly, though my enthusiasm is somewhat muted by the fact that so far the grades are lower than world class examples of traditional LREE dominated carbonatite deposits. The four holes drilled on the ST1 anomaly 3 km west of the ST40 target yielded much better rare earth intersections which confirm thick intervals of TREO mineralization ranging 1.5%-4.0% similar to the sampled outcrop material. Hole #4 averaged 1.0% TREO over its entire 126.1 m length with a rock value of $88/t, including 50.25 m of 2.19% TREO (rock value $189/t), which in turn included 9.55 m of 3.98% (rock value $328/t). All the holes into the 1,000 m by 500 m ST1 radiometric anomaly yielded relative REO distributions similar to the outcrop distribution, as shown in the pie charts below in which I feature the high grade 9.5 m interval. This distribution is similar to that of typical light rare earth dominated carbonatite bodies such as Bayan Obo, Mt Weld and Mountain Pass.
The ST1 holes were drilled 175 metres apart and are insufficient to clarify the geometry of the mineralized system, but the overall geological context does indicate that the Sarfartoq complex is a major rare earth system. Unfortunately the grades of the other world class carbonatite deposits are significantly higher than Hudson is achieving at Sarfartoq in the ST1 anomaly area. But this is the first pass of drilling focused on the rare earth potential; past work focused on niobium enriched parts of the complex. Hudson needs to return next year with an expanded drill program to sort out the geometry of the mineralization and identify structures that contain higher grade material and have a large enough tonnage footprint to make development as a "strategic" resource plausible. So while the first exploration pass has not delivered a no-brainer success, the Sarfartoq complex has been confirmed as a major rare earth play.
Hudson's Sarfartoq project has an implied project value of $34 million which I regard as Fair Relative Spec Value compared to the $110 million implied value for Rare Element's much more advanced and higher grade Bear Lodge deposit in Wyoming. I believe the Sarfartoq complex deserves more exploration which cannot resume until the spring thaw in 2010. Meanwhile Hudson faces a structural problem in that on Monday November 16 a private placement of 5.3 million units at $0.20 comes free trading. This financing was done by only 17 placees, so a rush for the exits is not likely. However, Hudson's Jamie Tuer is in a bit of a quandary because he now has the right to trigger accelerated expiry for the 5.3 million warrants at $0.30 which would otherwise be good for 18 months. Hudson has about $1 million working capital, but will need considerably more if it wishes to do justice to Sarfartoq next year. The trigger for accelerated expiry is that the stock must trade at an average price of $0.50 or higher for 30 consecutive days. There is no reason for the stock to head higher on fundamental terms during the next six months, but if Rare Earth Mania intensifies during the next six months, Hudson will head higher as the market gravitates towards projects where drilling can flesh out a deposit.
My immediate concern is that if Tuer pulls the trigger the placees may feel inclined to sell stock to pay for the exercise, which would put downward pressure on the stock price, perhaps to the point where the warrants expire unexercised. That, however, would eliminate the overhang and enable Hudson to develop an uptrend which capitalizes on a resumption of Rare Earth Mania during the next six months and allows Hudson to finance at a higher price. On the other hand, if the warrants get exercised even though the stock gets pressured into the $0.30-$0.40 range, Hudson will have $2.5 million working capital and represent an excellent bottom-fish buy in the $0.30-$0.49 range. But if Tuer does not pull the trigger and the stock weakens so that the 30 day average falls below $0.50, he will face an overhang in 2010 when a natural market uptrend will likely be in place, and his treasury will be weak. If I were in Tuer's shoes I would take the risk that Rare Earth Mania might evolve slower than one wishes, and pull the trigger on the accelerated expiry. I am thus converting the open recommendation to Fair Relative Spec Value, which means that I do not expect the stock to outperform the Rare Earth Index until Hudson is in a position to deliver new fundamental information about Sarfartoq's potential, and that the stock price is at the mercy of the market's mood about the rare earth sector. In addition I am warning that Hudson's stock price is vulnerable to downside pressure due to a structural problem of a temporary nature, which should be viewed as a watch alert for bottom-fishers not long the stock.
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