Formation Will Produce Idaho Conflict-Free Cobalt By 2Q 2012

By Kevin Michael Grace

Critical metals, or green metals, as they are sometimes known, are the minerals essential to the economy of the future. Almost universally, they are in short supply, and production of secure supply is several years away. Formation Metals’ Idaho Cobalt Project is an exception. Vice President of Communications Rick Honsinger nails it down: “We will go into initial production before the end of the second quarter of 2012.”

A geologist, Honsinger was present at the staking of the project in 1995 and the start of drilling in 1997. From the beginning, the project was designed, as Idaho Governor Butch Otter has written, “with environmental protection paramount at every step.” As a result, permitting has been long and arduous. Today, with the goal in sight, Honsinger can’t wait to get started.

“We have the refinery up and running right now,” he reports. “We have all the people in the infrastructure in place, and we’re actually refining silver and gold bullion for our clients there right now. All the operations can act independently of each other, so we will still maintain that operation while we’re shipping cobalt concentrate to our hydrometallurgical complex just outside of Kellogg, Idaho. We want to start mine construction before the end of the second quarter of this year.”

According to a 2007 feasibility study, the project has proven and probable reserves of 2.64 million tons grading 0.559% cobalt, 0.596% copper and 0.48 grams per tonne gold at a 0.2% cobalt cutoff—29.5 million pounds cobalt, 31.4 million pounds copper and 37,000 ounces gold. Inferred resources are 1.12 million tons grading 0.585% cobalt, 0.794% copper and 0.017 ounces per ton gold—13.1 million pounds cobalt, 17.8 million pounds copper and 19,000 ounces gold.

In 2007, the Net Present Value of the project, discounted at 7.5%, was $191.9 million, with a 38% Internal Rate of Return. A 10-year mine life is forecast, with cobalt produced at $7.73 per pound. If inferred resources are considered, a further four years are added. Honsinger notes, however, that the entire resource is contained in the Ram Deposit, which is one of over 20 target zones identified on the property, four of which have hit ore-grade intercepts. He adds, “Ram itself is still open along strike and at depth. Considering all the un- and underexplored zones on the project, it’s quite likely mine life can be easily extended far beyond 14 years.”

World cobalt demand in 2010 was just under 60,000 tonnes. By 2016, this is predicted to rise to over 90,000 tonnes. Demand is driven by increased usage in lithium ion batteries, and soon, in electric vehicles. In addition, cobalt is used increasingly as a catalyst in the desulfurization and in GTL (gas to liquid), the conversion of gas into synthetic diesel fuel. The current cobalt price is about $20 a pound, but Honsinger says, “We can see cobalt easily doing $30 a pound, if not more.”

As it turns out, the cobalt produced in Kellogg will be ultra-high grade (over 99.8%) and sold at a premium for a different purpose: superalloys. Honsinger explains, “I’m referring specifically to the moving parts of jet turbine engines. Both land and air based.”

Superalloys account for about 19% of world cobalt consumption. The United States accounts for about 58% of world consumption, and, as Honsinger points out, “They have no domestic source.” Needless, to say, America is a significant producer of jet turbines for military and civilian use.

Accordingly, companies are lining up for Formation’s cobalt. “I can’t name them just yet,” Honsinger says. “We’re under confidentiality agreements, but they’re the companies you would expect to see in the aircraft industry.”

Formation’s cobalt is premium for another reason—it does not come from the Congo and the other countries in central Africa that produce two-thirds of world supply. African cobalt is sometimes mined by children and the profits from its extraction are used to fund an ongoing, multinational war that is one of the bloodiest in modern history. Both the US Congress and the Securities and Exchange Commission are close to finalizing strict regulation of so-called conflict metals. This is a boon to Formation, for as Honsinger points out, “Our mine is located in Idaho, and it has a secure supply chain. It will produce ethically-sourced, conflict-free, socially-responsible cobalt.”

After a March $80-million equity financing, Foundation has $84.7 million in cash. Production is dependent on access to $77.7 million raised through the sale of tax-exempt industrial bonds. “Before we can access those funds,” Honsinger says, “we need to obtain some form of credit facility to back them. We have engaged BNP Paribas as our mandated lead arranger. They’re currently in the process of the due diligence, which we expect will be wrapped up within five to seven weeks.”

At press time, Foundation had a market cap of $107 million. Late last year, shares reached a high of $2.76; they are now at $1.18. Honsinger argues, “Of course I’m biased, but I think we’re greatly undervalued. But you don’t need to take it from me; you can take it from the independent analyst report by Byron Capital Markets, which was one of the co-lead arrangers of our recent financing. Their report gives us a target price of $2.70 with a buy rating.”