Long and winding road to an Idaho cobalt mine

Formation Metals' CEO Mari-Ann Green describes what it is like to be in the throes of construction and completion of financing on the Idaho Cobalt Project.

Author: Kip Keen
Posted: Thursday , 28 Jul 2011

VANCOUVER, BC -

Formation Metals (TSX: FCO) started to move some dirt at its Idaho Cobalt Project (ICP). That was the gist of Formation's latest press release out a few days ago updating progress on the construction at its core asset: a cobalt deposit in Idaho from which it plans to produce 1,525 tonnes of high-purity cobalt a year for the super-alloy markets starting about mid-2012.

This may not sound like much of a triumph to go into depth on: trees cleared, earthworks for a portal bench and mine access underway and the same soon to come at the mill and concentrator site. But in Formation Metals' case there is no question it amounts to just that - a victory in what might be described as having been a war of attrition to get a cobalt project off the ground.

Consider this: It has been over a decade and a half since Formation Metals (under a different name) listed on the TSX, 14 years since it punched its first drillhole, a decade since it first outlined a mine plan for the ICP in a prefeasibility study, and a seemingly endless interim filled with battles to get permitting, site access for roads and electricity and financing, finalization of which is close at hand.

Also consider that the current CEO Mari-Ann Green was there from the beginning as one of the company's founders. That she is still at the top today is something in an industry where the heads of junior exploration companies, especially in the face of seemingly insurmountable hurdles, roll as often as did heads during the French Revolution.

But Green has kept hers, for example, as Formation brought on side Idaho environmental groups en route to getting a go-ahead for the mine from the US Forest Service a couple years ago, or in dueling with Xstrata in the late 2000s, not only a neighbour with part ownership of a US environmental Superfund site, but also, to complicate matters, a major cobalt producer. The two found peace in the late 2000s, settling, among other things, access for ICP minesite power.

So what do some ostensibly minor earthworks really mean?

"You can't really say, 'Phew', in a press release; you know, show that you're wiping your hand across your forehead," says Green, describing what it feels like to see ground finally moving at the ICP. (In that press release Green sounded as celebratory as one can in a written statement: "We knew it was only a matter of time, but it is still very gratifying to see heavy equipment turning dirt at the mine site.")

So it's fair to say there is tremendous relief now construction is underway at the ICP. Though there remains much to do - finalizing debt financing with BNP Paribas the major thing - there is nonetheless a sense that the long wait to see Formation actually making the metal it has long been talking about is nigh.

It's not all over, true. But in speaking with Green it can't help get across to the listener that, after the challenges Formation has faced and overcome through the years, little would faze her or be able to get in between this dogged CEO and the ICP. Green is unwavering that now, barring some unforseeable catastrophy, financial, physical, or otherwise, Formation will be ready to produce next year.

With such tenacity, Green describes how Formation was ready for any issues that might arise in the ongoing process to finalize a loan from BNP Paribas. "If it's the whole $77 million, that's wonderful," Green says. But on the other hand, if Formation doesn't get the full $77 million, she says, sounding unperturbed, "we might have to supplement it with some mezzanine debt, or some other financing."

Whatever the case may be, Green expects financing to be behind Formation no later than the middle of September. The whole $77 million loan would add to the $67 million Formation has in the bank, leftover from an $80 million financing it completed this year, and essentially cover the recently updated $140 million capital cost of the ICP.

When or if financing does come through - which Green says should be finalized by September - it could also remove an overhang on Formation's valuation. Formation's market capitalization stands at C$93 million or just C$26 million above the amount of cash it has on hand. Green thinks that will change once the full financing is in place.

"The marketplace would like to see no uncertainty," she explains.

Lead me to your cobalt

Cobalt - supply, demand, and price - is of course another side to the story. Some would argue that mines in Africa, which produces some 65 percent of the world's cobalt and mostly in the DRC, can flood the market. As well, Formation does not have the benefit of record commodity prices as enjoyed by, say, juniors developing gold projects. Cobalt is far off highs it hit in 2008.

But those sore points don't add rot beneath the ICP's foundations, Green argues. She builds the case that Formation and its product, a high-purity form of cobalt, often used in super-alloys, such as those incorporated into jet aircraft, is insulated from the broader cobalt market.

"They actually can't make it," Green says of African producers and Chinese refiners.

Meanwhile, the price of cobalt that Formation expects to fetch for its premium product has held with the base case of the ICP project as set out in Formation's feasibility study. Lower quality cobalt - 99.3 percent pure - goes for about $16 per pound these days, but higher quality cobalt, the 99.9 percent pure stuff that Formation will produce, goes for a little over $20 a pound - just about that price considered in Formation's ICP feasibility study, which estimated production cash costs per pound cobalt at $7.73.

Green is not alone in attaching a supply and price premium to the cobalt that will come from the ICP. In an upbeat email outlining his thoughts about Formation's prospects Jonathan Lee, a Battery Materials and Technologies analyst for Byron Capital Markets, agreed that Formation will be insulated from African mined and Chinese refined cobalt.

"I believe so," Lee writes. "For high purity cobalt, an approval process is required for use in certain applications on the metallurgical side. With positive feedback with its pilot-scale product from potential clients, we believe this is a competitive advantage for Formation. "

As for price, Lee notes that lower quality cobalt and high-purity cobalt trade differently. He writes, "given that high-purity cobalt prices are more price insensitive and are mostly traded on a contract basis, we'll see less fluctuation with the prices."

These are arguments - price and supply advantages in Formation's favour - that have no doubt convinced others, including BNP Paribas, to seriously consider Formation's case for building a cobalt mine and processing facility. Lee, for example, notes the BNP loan would in his view likely be finalized and, given ongoing construction at the ICP, he says, "we think Formation will continue to deliver."

Buyers appear to hope so too. According to Green Formation has had talks with several traders and end users about building supply relationships once, as planned, the ICP is up and running in 2012. Of note - especially for a CEO that is used to making contingency plans - is that Green draws attention to the fact call volume from potential customers for Formation's cobalt has been high enough there are "no plans to have any extensive marketing department."

ICP Overview

Minelife: 10 years
Net present value: $87.29 million @ $22.52 price of cobalt and 7% discount rate.
Proven and probable reserves: 2.6 million tons @ 0.559% cobalt, 0.596% copper and 0.014 ounces per ton gold with a 0.2%. cobalt cut-off.
ICP's proportion of global cobalt supply: 3.3%.
(Source: Formation Metals)

Metatags: Formation Metals, Idaho Cobalt Project, cobalt, mine construction, Mari-Ann Green, Xstrata, BNP Paribas.