As the holder of 17.08% of the common shares of Formation Metals we are soliciting your support and proxy at the upcoming Annual General and Special Meetings (AGM) to be held on June 21, 2013 to vote for two experienced individuals as nominee directors to replace Mari-Ann Green and Scott Bending and to vote for other matters on the agenda for the AGM as herein discussed.
Our investment in Formation Metals:
We, like many of you, invested in Formation Metals in expectation that it would develop the Idaho cobalt project in a timely and efficient manner. We initially invested $17,500,500 in an $80 million prospectus financing in March, 2011 at $1.50 per unit of one share and one half of a 3 year share purchase warrant exercisable at $2.00 per share, for a total of 11,667,000 shares and 5,833,500 warrants. We acquired an additional 3,902,500 shares in the market in November, 2012 at an average cost of $0.30 per share or $1,170,750. Today our total investment of $18,671,250 is represented by 15,519,500 shares (17.08% of the currently outstanding shares) at an average cost of $1.20 per share. This is a long way from the price of $0.07 at which the shares closed on the TSX on June 12, 2013 and the warrants are an even longer way from being in the money. The market capitalization of the Company was only $6.4 million as at June 12, 2013 which is only approximately 36% of our entire investment.
To say the very least, we are not happy with the performance of our investment - nor should you be with yours. The Formation Metals shares have dropped more than 95% from $1.50 to $0.07 since we made our initial investment in March 2011, a mere two years ago. I suspect your investment looks just as bad.
What did current management promise?
In the prospectus filed for the $80 million equity financing in March 2011 current management represented that the Idaho cobalt mine and refinery would be achievable for total cost of US$138.7 million, of which US$75mm was for the mine and mill and US$63.7 was for the refinery. They also represented that the net proceeds of that $80 million financing plus the proceeds of the industrial development bonds already raised would suffice to pay all the remaining costs. However, as stated in the 2013 AIF recently filed, the estimated total cost has now risen to $173.117 million, an increase of 25%, and the amount remaining to be spent is still $118.3 million with $54.8 million spent on the mine to-date (including amounts spent on long lead time items totalling $16.5 million). This estimate no doubt would rise further if construction were to resume. What do we have to show for it?
With respect to the market for cobalt metal, current management has represented that completion of the mine, mill and refinery would make Formation Metals the leading primary producer of cobalt in North America, supplying a growing industry with ever-increasing demand for the metal. To date the project is neither completed nor producing, the industry is not growing and cobalt demand has declined. Furthermore, management of the Company has now discontinued construction of the cobalt mine and has purported to sell the refinery (without which the Company cannot, in our view, operate the mine) at a price we believe is imprudent and without shareholder approval.
Based on publicly available information, in our view the cobalt mine was barely economic from the beginning, and certainly is not economic now. The current estimated cost of the Company producing a pound of cobalt metal is approximately US$10-12 before financing and administrative costs, whereas the world price currently is only in the range of US$13-14 per pound.
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