Grandich's Blog

Formation’s financing news seems to have caused a knee jerk sell-off reaction, I’d guess primarily by retail investors who may not fully understand what Formation has accomplished here – much like the same reaction to Monday’s news announcing the name change and share consolidation.

A little on the consolidation announced Monday.  Bottom line, it needed to be done in order for them to move forward on their mine financing.  In Formation Metals’ case, a share consolidation is a positive move done to open financing doors and put the company more in line with its mid-tier base metal producer colleagues.   It is more attractive to mine financiers to finance a company with 34 million shares out trading closer to $2.00, than one with 240 million shares out trading under 30 cents.   I applaud their decision.  Their new consolidated share price is expected to start trading on Friday morning, based on seven times the value of Thursday’s closing price.  Their symbol remains the same; FCO.TSX

Now the financing news.  A few major points I read into this:  1)  To start, basically this is a 70:30 debt to equity financing.  This is a favorable ratio in today’s market where many financiers appreciate the fact that resource stock prices are depressed and want as many shares as they can get their hands on.   2) they have structured the financing so that after two years, when they expect to be in production and generating cash flow, they can at their election, re-finance their debt under what is expected to be more favorable terms.  Management was insightful on this one.  The news release, however, is unclear on this point, and does not drive home this critical fact.  3)  At the end of the day it looks like they will still be diluted by close to 100%, which at first glance seems excessive.  However, this could generate on the order of  $275 million dollars that would come with the equity issuance, depending on what the shares and warrants will be priced at, and of course, help facilitate a revenue generating mine. They are not giving them away!  Considering that their current market capitalization is around $60 million, to issue 100% additional shares to generate $275 million puts things in better perspective. 4)  Lastly, the equity portion of this financing will not be set until the debt portion of the financing is completed, or in other words, until they have successfully raised $115 million for the cause.  I would expect that at that point their share price should reflect this  accomplishment and fewer shares may need to be issued to raise the remaining $45 million, which I also note, does not have any warrants attached to it.

I wonder what would have happened if they announced instead that a major mining company was going to fund the entire project for 50% of the cobalt mine.  I suspect the reaction would have been very positive.  Ironically, this is also equivalent to 100% dilution, (giving up 50% of your primary asset) yet in this case you would also give up 50% of all future earnings!  This is not the case here, yet the markets obviously expected something better.  I’m not sure what else management could have done but they are doing exactly what they said they would do – raise the money to build their mine.

I see than Jenning’s Capital Morning comment today still has a $1.20 target price.  That’s an $8.40 target post consolidation.  That at least is what one mining analyst is saying.  While some near term weakness pre/post consolidation is possible, I think the smart thing to do here is to look at 2010 and beyond knowing one owns the only pure cobalt mine in North America.

Tags: cobalt