* Shares hit new year high at C$8.29
* Mackie Research initiates coverage, targets C$10.50
* Says rare earth potential good, development costs high
TORONTO, Feb 17 (Reuters) - Shares of Avalon Rare Metals <AVL.TO>were up more than 9 percent early on Thursday afternoon after MackieResearch initiated coverage on the rare earth exploration company with a"speculative buy" rating.
Mackie Research analyst Matt Gowing said he sees Avalon as undervalued and set a C$10.50 target price for its shares.
They hit a year high of C$8.29 on the Toronto Stock Exchange onThursday before retreating to C$8.11. They have risen more than 140percent in the past six months.
The Toronto-based company isdeveloping the Nechalacho rare earth project, also known as Thor Lake,in Canada's Northwest Territories.
"We think that the market isnot anywhere close to where the valuation of the mine should be," saidGowing, noting that the Avalon recently updated Nechalacho's resourcesize and identified new higher-grade material.
Rare earths are an essential ingredient in much modern technology, from smartphones to flatscreen TVs.
More than 95 percent of the global supply of the group of 17 rareearths comes from China, which sparked supply worries in 2010 by tightlyrestricting exports.
Gowing said that high rare earth oxideprices have boosted the value of the company's deposit and noted that hesees more upside potential for heavy rare earth oxide prices.
Avalon hopes to start production at Nechalacho in 2015, with plans toproduce around 10,000 tonnes a year. Output can be expanded and willdepend on sales volumes.
Building a mine at Nechalacho mine and a facility to process and separate the rare earths will cost around C$1.3 billion.
Gowing said Avalon will need to sign a major offtake agreement in the near future to ensure funding to develop the mine.