Over the course of the summer there has been little news from Formation Capital, but it is not as if Management has been on holidays. Behind the scenes they have been busy focusing on securing a mine financing for their 100% owned Idaho Cobalt Project and getting the Forest Service to sign off on their mine plan, which, according to Management, the Forest Service has had since February. But more on the mine plan later.
Asked when shareholders can expect an announcement on the cobalt mine financing, I was advised “We wish we could give you an answer regarding timing on a finance announcement, but we simply can’t at this time. Rest assured the mine financing is being worked on, and progress is being made. However, we can’t make an announcement until all the details have been worked out, which, in a financing of this size, takes time. Getting all parties to sit down and work out terms in the middle of summer when everyone is taking holidays has been like herding cats.” Hence the lack of news over the summer.
In particular, Management advised me that they have been considering many financing avenues that shareholders will be happy to hear are non (or minimally) dilutive, equity wise. They include the issuance of Tax Exempt Industrial Bonds, Off-Take Arrangements (selling product forward for cash upfront) as well as possible revenues stream buyers (similar to the Silver/Gold Wheaton model). These forms of financing could comprise a significant portion of the total US$150M required, where the remaining balance might be raised in the form of a commercial debt note. At least that appears to be their current plan. Of course, one can expect some equity issuance associated with the financing, perhaps in the form of a warrant associated with the note, but their goal is to minimize any equity dilution.
Now about that Mine Plan. The Forest Service, although they conditionally approved the cobalt mine plan with the issuance of the Record of Decision back in January, (upheld April 23); they have yet to give it a final sign off. The holdup seems to be both parties not being able to agree on a reclamation bond amount. According to the Record of Decision, the Forest Service is looking for $44M (+ or – 20%) to bond for surface reclamation and for water treatment in perpetuity (which means 100 years post closure). While Formation does not have any disagreement with the surface disturbance portion of the bond, they point out that requiring water treatment in perpetuity is not in accordance with the Forest Service’s Final Environmental Impact Statement (EIS) on the cobalt project. Using the scientific data derived from studies used to compile the final EIS, such a lengthy term for post closure water treatment would not be necessary. However, Formation, with a proven track record of being environmental responsible, is willing to err on the side of caution and agree to a 30 year post closure water treatment, which, as expected would require a considerably smaller bond amount.
The whole bond debate seems a mute point to me, and Formation Capital is scratching their head over the same issue for the following reason: In the Forest Service’s Record of Decision they state, and I quote, “The bond amount will reviewed annually after approved operations begin to ensure its adequacy.” Formation would obviously like to see the issue settled and get the final mine plan approved ASAP, and if there are any inadequacies, they can be addressed and the bond modified accordingly, either up or down at a later date.
On a side note, cobalt prices have recently started to rebound which bodes well for the Company. In additional to the summer doldrums, it was difficult for Management to secure a debt portion of a financing when cobalt was trading under twenty dollars per pound when their base case scenario in the Bankable Feasibility Study utilizes $22.52 per pound cobalt – even though their costs of production are reportedly only $7.73 per pound. Cobalt is currently being offered at around $21.00 per pound. Normally, cobalt prices don’t recover until the fall, typically in October, so this is a good sign to see an early resurgence in cobalt prices that should help move the financing along.
The London Metal Exchange (LME) recently announced that it will begin spot and futures trading of cobalt on February 22, 2010. Although some predict initial volatility when cobalt starts LME trading (http://www.formcap.com/s/CobaltNews.asp) the overall consensus seems to be that the historic volatility and lack of transparency in the cobalt markets may soon be coming to an end. Chris Evans, formerly of Metal Bulletin who produced the bi-weekly cobalt price, who now works at the LME, stated recently in an article on the LME and cobalt, “While I wouldn’t want to cast the LME as the lifeguard to the cobalt industry, fending off the attack of sharks, I do think that the market gyrations of the past year perfectly illustrate how a LME contract could help the industry manage volatility better.” At the very least, this not only creates a transparent market for their cobalt produced, but it will also allow Formation Capital to enter into forward sales contracts giving management, analysts and financiers a better tool for predicting future earnings and economics of their cobalt project.
There has also been increased awareness of Lithium-Ion (Li-Ion) rechargeable batteries recently with GM’s launch of its fully electric vehicle, the Volt, and the Obama administration’s $1.2 billion in handouts to rechargeable battery manufacturers – all designed to stimulate the U.S. economy and boost production of hybrid and electric vehicles. A Li-Ion battery contains a significant amount of cobalt, up to 60% cobalt by weight, while the same battery contains only 3-4% lithium by weight. According to Roskill Information Services, the production of Li-Ion batteries has grown 22% per annum since the year 2000, and that 40-60% of year-on-year growth in overall demand for cobalt came from the battery sector in 2000 – 2007, with 90% of that consumed in Li-Ion batteries. This is a sector that is not slowing down and Formation is poised to help feed that demand.
Production of Lithium-Ion batteries, 2000-2008 (M Units)
Source: IIT, Yano Research, Roskill Estimates
CNBC and other news agencies have been covering these battery developments as well as the problems of relying on places like the Congo for cobalt required in the production of these batteries. The Company has posted a link on their website to view these CNBC news video clips I’ve posted here below:
Batteries: The New Oil?
http://www.cnbc.com/id/15840232?video=1214209086&play=1
Dollars and Danger – Cobalt and the Congo
http://www.cnbc.com/id/15840232?video=1148104078&play=1
In the first week of September their IR department advised me that they received more than the usual number of call and emails in response to the declining share price from $0.32 to $0.27. Rather than due to some material change, and notwithstanding the lack of news, this recent drop in price is most likely the result of a 10 to > 20% profit taking from their last financing (where they raised $8.25M at $0.25) as those shares became free trading after the four month hold period expired on August 31.
The next news release will most likely be related to one of three developments, 1) the Forest Service’s signing off of the Cobalt Project Mine Plan of Operations, where I suspect at the end of the day a compromise will be made on both sides, 2) an announcement related to the mine financing for that project, or 3) the long awaited uranium results from drilling earlier this year on their Virgin River project joint ventured with Cameco (operator) and AREVA. The question remains when, but I suspect that post Labor Day we will see progress on all fronts pick up.
Management of Formation has made it public that their goal is to start construction on their cobalt Project before the onset of winter, which according to my calculations would give them until later in October. That remains to be seen. Regardless of what happens there, you can be certain that this management team, who has stuck with this project since its inception 14 years ago, is not about to give up on it now. That is one thing I can guarantee my readers.
