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Formation Metals Inc. (TSX:FCO,OTCQX:FMETF) is a well-established Canadian mineral exploration and mine development company focused on cobalt production in Idaho, USA. Through its wholly-owned subsidiaries it has interests in cobalt, uranium, and other base and precious metals in Canada, the United States and Mexico.
The Company’s primary asset, located in the mining friendly state of Idaho, is the 100% owned, Idaho Cobalt Project (ICP). The ICP is a unique, high grade, primary cobalt deposit which is comprised of the mine and mill site located near the town of Salmon, Idaho and the proposed refining facility, the Cobalt Production Facility (CPF), a stand-alone hydrometallurgical facility that will process the ICP Mine concentrates into cobalt sulfate, copper sulfate, copper concentrate, magnesium sulfate and gold.
Cobalt is an essential element utilized in the production of rechargeable batteries required for portable electronic devices and electric and hybrid electric vehicles. Cobalt’s usage in batteries now accounts for 42% of world refined cobalt consumption. Cobalt’s second largest use is for critical applications in the aerospace sector which includes the production of both air and land based jet turbine engines.
The ICP is the only near term, fully permitted primary cobalt deposit in the United States.
The Company announced in April 2015 completion of a positive Preliminary Economic Assessment (PEA) on the ICP. This current PEA utilizes an updated resource, mine model and mine schedule with intentions to produce cobalt and copper sulfate chemicals and gold at the CPF. The previous feasibility level study on the ICP utilized a previously calculated resource base to produce high purity cobalt metal suitable for critical applications in the aerospace sector.
The ICP is an advanced stage project and is fundamentally prepared to commence underground development contingent upon the successful conclusion of mine financing. The Company has spent US$65.3 million and completed two phases of the ICP construction program that commenced in June 2011 and completed in December 2012. The ICP has completed an Environmental Impact Statement and has received a positive Record of Decision from the U.S. Department of Agriculture National Forest Service allowing for the construction of the mine and mill facilities.
ICP – Robust Economics and Revenue By-Products
The PEA’s economic model resulted in a post-tax NPV of US$113.45M and an IRR of 24.07% using an 8.5% discount rate and 35% corporate tax rate. The report is based on an underground mine with a target production rate of 800 tons per day with a weighted average annual production of 2,771,000 lbs of cobalt, 4,533,000 lbs of copper and 3,600 oz of gold over a 12.5 year mine life with an estimated pre-production period of 21 months for full production ramp up utilizing a 0.25% cobalt cut-off for stope design. The Company is in the process of advancing the ICP towards definitive feasibility. The results from ongoing metallurgical test work suitable for a feasibility study are expected by the end of the Company’s second fiscal quarter (August 31, 2015).
The PEA has demonstrated the ICP’s diversified product potential. The base case revenue stream for all its products over the life of mine (LOM) is approximately US$983M of which the majority, US$690M, is attributed to cobalt sulfate. In addition to cobalt sulfate, the ICP will produce copper concentrate and gold metal with a value of approximately US$100M over LOM and a significant amount of saleable by-products for the agricultural industry, namely copper sulfate and magnesium sulfate. Over the LOM, the ICP is expected to produce approximately US$140M worth of copper sulfate and approximately US$55M of magnesium sulfate. The Company is currently in the investigative stages of pursuing potential off-take agreements for all the ICP products.
Formation has strategically positioned itself to offer its shareholders North America’s only primary cobalt deposit – an advanced staged, environmentally conscious opportunity that can be rapidly advanced towards production.
The total revenue and net present value from each of the products produced during the LOM using base case prices are summarized in the table below.
The chart below shows the total revenue composition of the ICP during the LOM where the main revenue source comes from cobalt sulfate heptahydrate followed by copper sulfate, copper concentrate, magnesium sulfate and gold.
- Advanced Stage – Near Production – 90% Earthworks Complete (13 month pre-production and 8 month ramp up to full production)
- No Long Term Debt
- Restructured & Refocused Board and Management
- Unique primary cobalt deposit in the USA –the worlds’ largest consumer of cobalt.
- Ethically sourced
- 100% owned – no royalty
- Planned vertical integration – Mine to Market
- Idaho Cobalt Project is estimated to produce 55% of USA demand for cobalt chemicals.
- Projected demand for cobalt – minimum 5 fold increase in USA cobalt consumption as more battery plants are constructed.
- Strong market demand for cobalt fueled primarily by the battery sector
- Significant resource growth potential – Mineralization open along one strike direction and at depth, with several untested targets within property boundary
- Committed to sustainable mining
- Long term off-take agreements possible
- Opportunity to produce a range of value added products
POSITIVE PRELIMINARY ECONOMIC ASSESSMENT FOR ICP (SUMMARY)
The PEA was prepared by Samuel Engineering (“SE”) of Denver, Colorado in conjunction with Mine Development Associates (“MDA”) of Reno, Nevada for an environmentally permitted underground primary cobalt mine with by-product copper and gold located in Idaho, USA.
Preliminary Economic Assessment on the ICP
(i) Economic Results
The PEA’s economic model uses a 35% corporate tax rate and an 8.5% discount rate, resulting in an after tax NPV of $113.45 million and an IRR of 24.07%. A pro forma cash flow was developed using conventional methodology utilizing the base case 8.5% discount rate, before and after tax determination of project economics, annual cash flows discounted on an end of year basis with costs estimated in first quarter 2015 U.S. Dollars.
A summary of the Life of Mine (“LOM”) economic results are shown in the following table. Note that all monetary values used in the economics results of the PEA are in US$.
Pre-Tax NPV8.5%: $148 million, IRR 27.7%
Post-Tax NPV8.5%: $113 million, IRR 24.07%
Initial Capital Costs: $147 million
Life of Mine (LOM): 12.5 years post preproduction
EBITDA: $515 million
LOM Gross Revenue: $983 million
LOM Total Net After Tax Cash Flow $258 million
LOM Average Net Cash Cobalt Production Cost: $4.94 per pound (net of gold, copper and magnesium credits)
Pre-Tax Initial Capital Payback: 3.7 years
LOM Cobalt Production: 35,356,415 pounds
LOM Copper Production: 57,384,700 pounds
LOM Gold Production: 46,858 ounces (including ounces in copper con and doré)
The Idaho Cobalt Project
The Company’s flagship project, the 100% owned Idaho Cobalt Project (ICP) is comprised of the mine and mill site located in Lemhi County, Idaho, near the town of Salmon, Idaho and the proposed refining facility, the Cobalt Production Facility (CPF), a stand-alone hydrometallurgical facility that will process the ICP Mine concentrates. The Company owns a 16 acre industrial zoned package of land near Kellogg, Idaho which is suitable for the future placement of the CPF. The Company is also investigating other locations for the refining facility optimally located closer to the mine site and a railhead to reduce the operating expenditures of the ICP.
Black Pine Project – Idaho, USA
The Black Pine Property is proximal to Formation’s Idaho Cobalt Project and could potentially serve as an additional source of feed for the ICP mill and concentrator.
Stratiform sulphide mineralization is found in massive sections which typically contain pyrite and chalcopyrite. Aside from the copper rich strata, there are a number of narrower cobalt-gold rich arsenopyrite-bearing beds present in the copper mineralized section. In 1992, the company optioned the Black Pine property and shortly thereafter staked additional claims.
Since the acquisition of Black Pine, Formation has completed exploration including geological mapping, soil geochemistry, geophysical surveys, trenching and drilling programs. Formation has completed 100 diamond drill holes totaling 44,954 feet, and 100 reverse circulation holes totaling 15,625 feet.
Core drilling has defined a preliminary (historic, in house, non National Instrument 43-101 compliant) sulphide resource of 224,673 tons grading 4.17% copper, 0.013% cobalt and 1.269 grams per tonne (gm/T) (0.037 oz/t) gold has been calculated for the Swift East and Trench zones. Comparatively under-explored zones include the Regina zone where the best drill hole intersected a cobalt-rich horizon which assayed 1.133% cobalt. 0.02% copper and 1.920 gm/T (0.056 oz/t) gold over 17.5 feet and the Troll Zone where drilling intersected a copper-rich horizon grading 0.164% cobalt, 4.90% copper and 0.446 gm/T (0.013 oz/t) gold over 9.2 feet. All of these zones remain open in at least one direction.
Gold / Silver Projects
Morning Glory and Queen of the Hills Project – Lemhi County, Idaho, USA
The Morning Glory and Queen of the Hills Project is situated in Lemhi County, Idaho, USA, approximately 4 miles northwest of the town of Salmon, Idaho. The Company has a 100% interest in certain mineral claims with prospects for gold and silver.
The property contains shear hosted oxide gold occurrences believed to be amenable to open pit mining techniques processed by heap leach recovery techniques. Meridian Gold’s Beartrack Mine which was mined out in the early 2000’s, located 4 miles west of the Morning Glory property, is a similar shear hosted, heap leachable oxide gold deposit. Numerous high grade gold sulphide-quartz veins are also present on the Morning Glory property.
Previous work on the property included property wide reconnaissance surveys, soil sampling programs, geophysical surveys, preliminary trenching, old mine workings rehabilitation and the completion of 23 reverse circulation drill holes.
The Company also has a 100% lease option on certain additional mineral claims located in the same area. The Morning Glory Project is currently available for joint venture and Confidentiality Agreements have been signed with interested parties.
El Milagro – Mexico
The Company has owned a 100% interest in the prospective silver-rich base metal property since 2003. The primary target defined within the Milagro Concessions is the Santa Maria Vein, a one to four meter wide tabular subvertical NNE trending breccia vein that has been mapped over a strike length of 450 meters, with a lead-rich polymetallic assemblage and bonanza silver grades. This vein, localized along the footwall contact of a sericite altered dike, is cemented by a fine grained intergrowth of galena, sphalerite, pyrite, barite and manganese oxides.
Virgin River Project – Northern Saskatchewan, Canada
The Company through its wholly owned subsidiary, Coronation Mines Ltd., owns 2% of the Virgin River project located in the Athabasca Basin of northern Saskatchewan. Cameco Corporation (“Cameco”) and AREVA Inc. each own 49% in the joint exploration agreement with Cameco acting as the operator of the project.
The Company also has the first right of offer to acquire up to 10% of the project and has been carried through to $10,000,000 worth of exploration and development.
The Centennial Deposit has been traced over 650 metres of strike length and has a minimum across strike width ranging from 10.0 metres to 52.5 metres.
Kernaghan Lake/ Bell – Northern Saskatchewan, Canada
The Company granted an option whereby the optionee earned an 80% interest in certain mineral claims by making certain payments (received), and completing exploration work totaling $1,000,000 (deemed completed). The project area is located near the northeast rim of the Athabasca Basin approximately 42 km north of Points North Landing. The Kernaghan / Bell project currently consists of 13 mineral claims totaling 4,342 hectares. The target unconformity depth ranges from 160m to 290m. To date 38 diamond drill holes within the property outline totaling 10,051.4m have been drilled targeting the unconformity. Anomalous uranium intersections were returned from two drill holes with a maximum partial uranium value returned in drill hole KB-11 of 160 ppm and a maximum partial uranium value returned in drill hole KB-07 of 34.2 ppm. None of the holes drilled in 2009 intersected significant uranium mineralization.
Formation Metals has the potential to meet almost 55% percent of USA’s current cobalt sulfate demand through its 100 percent owned Idaho Cobalt Project in east central Idaho. The ICP would be the U.S.A.’s only near term, significant producer of cobalt targeting the rechargeable battery sector’s Electric Vehicle, Stationary (Grid Storage) and portable hand held communication devices’ rapidly expanding markets.
The ICP’s North American location is a strategic one for the electric vehicle and rechargeable battery manufacturers with rapidly expanding operations on the continent. The project is estimated to produce 1,386 tons of cobalt annually over a minimum 12.5 year span. The production of additional saleable by-products (copper sulfate, copper concentrate, magnesium sulfate and gold) offer additional leverage and flexibility in negotiating possible financial arrangements for the project.
The project is advanced stage having received all essential environmental permits and could be in pre-production in 13 months (plus 8 months to full ramp up) subsequent to the successful completion of mine financing.
The Company is debt free and committed to sustainable mining.
J. Paul Farquharson, B.B.A. – President & CEO
Mr. Farquharson, former Chief Financial Officer for Formation Metals, has been with the Company for 22 years. He has been integral in the success of numerous financings and strategic acquisitions of the Company making significant contributions to the Company’s corporate development. In addition to his experience with Formation Metals, Mr. Farquharson has over 30 years of experience in financial management and regulatory compliance with numerous private and public resource companies across Canada.
Marc Tran, CPA, CGA, B.Comm, B.A. – CFO & Corporate Secretary
Prior to being appointed to CFO, Mr. Tran was the Controller for Formation Metals since October 2011. He has over 12 years of experience in corporate finance, financial management, and regulatory compliance with public companies. He has previously served as Director and CFO for other public companies with projects in mineral exploration, development, and production in Canada, US, Mexico, Central and South America.
E.R. (Rick) Honsinger, B.Sc., P.Geo. – Vice President
Mr. Honsinger’s geological and technical background brings over 25 years of project management, exploration and Q.P. related experience to the company. He is Vice President responsible for Corporate Development, Communications and related compliance and has managed and contributed to the success of numerous field and special projects during his past 20 years with Formation Metals Inc.
Robert Quinn, B.S.B.A., J.D. – Chairman
A founding partner of the Houston mining transactional law firm Quinn & Brooks LLP, Mr. Quinn has over 25 years of legal and management experience, including as Vice President and General Counsel for Battle Mountain Gold Company. Appointed to the Board of Directors of the Company in June 2006, he has extensive experience in M&A transactions, corporate governance, public disclosure, governmental affairs, environmental law and land management. Mr. Quinn has a Bachelor of Science degree in Economics from the University of Denver, a juris doctorate degree from the University of Denver College of Law and has completed two years of graduate work in mineral economics at the Colorado School of Mines.
David Stone, Ph.D., M.B.A., P.E., P.Eng.
Dr Stone has over 30 years of engineering and financial consulting experience to underground and surface metal mines worldwide. He has managed and led multidisciplinary project teams through pre-feasibility and feasibility level evaluations of development-stage projects, and has contributed to the engineering, design and construction of several mines. His expertise includes scoping and feasibility studies for open pit and underground projects, and an extensive international knowledge of current mining best practices, environmental permitting, mine planning and production scheduling, capital and operating costs, equipment selection, and financial analyses. He holds BA Sc. in Geological Engineering from the University of British Columbia and an MBA and PhD in Civil Engineering from Queen’s University. He is a licensed professional engineer in numerous Canadian and United States jurisdictions. Dr Stone sits on a number of Boards of TSX and Venture Exchange listed companies.
Robert Metka, B.Sc., Eng., M.B.A.
Mr. Metka has over 23 years of mineral production and engineering experience as V.P. of Projects for Noranda Minerals and V.P. and General Manager of CEZinc. He is presently a Principal of Hatch, the world’s largest international hydrometallurgical company.
James B. Engdahl
Mr. Engdahl has over 30 years experience in corporate finance, management, accounting and administration with major financial institutions such as Barclays Bank of Canada and the Bank of Montreal.
Gregory Hahn, P.Geo., B.Sc.
Appointed to the Board in May of 2013, Mr. Hahn has over 30 years of mining industry ex-perience and is currently the President of Canamex Resources Corp. He has served on the board of numerous companies including Marathon PGM Corp. and Metalline Mining where he was Director and Interim President & CEO. Mr. Hahn was also former District and Senior Geologist and Chief Mine Geologist with Noranda (now Xstrata) on the Blackbird Project, located adjacent to the Company’s 100% owned ICP. Mr. Hahn is considered an expert on the Idaho Cobalt Metallogenic Belt.
Scott Hean, B.A., MBA, ICD.D
Mr. Hean has over 35 years of experience in banking and finance. He is currently the Chief Financial Officer of Quaterra Resources Inc., a TSX-V and OTCQX listed junior mining and exploration company, and is a member of the Audit and Chair of the Compensation Committee of Sabina Gold & Silver Corp, a TSX-V listed company. Mr. Hean served as Senior Vice President and Managing Director with the Bank of Montreal, responsible for natural resources sector financing in North America. He also served with J.P. Morgan of New York, primarily financing junior oil and gas companies. He has served on numerous not-for-profit Boards including Outward Bound Canada and BC Children’s Hospital, and is currently Chair of the Bill Reid Trust. Mr. Hean graduated from Simon Fraser University in 1973 and from the Ivey School of Business in London, Ont. in 1975. He also graduated in 2006 from the Institute of Corporate Directors, Directors Education Program.
David Christie, P.Geo.
Mr. Christie has 29 years of experience in the resource sector. In April 2015 Mr. Christie was appointed President and CEO of Eagle Hill Exploration Corp. He also continues in his roles as Vice President with Goodman & Company, Investment Counsel Inc. and Dundee Resources Limited, wholly owned subsidiaries of Dundee Corporation. He is a Director of Eagle Hill Exploration Corp (EAG-TSXV), True North Nickel Inc. (a private company) and Condor Precious Metals Inc. (a private company). Prior to joining Goodman and Company, Mr. Christie was a highly ranked gold and precious minerals equity research analyst at two bank-owned dealers. He also has extensive experience in the North American mining industry working as a professional geologist exploring for gold, base metals, uranium and platinum group metals including underground experience. Since joining the Dundee organization in 2011, Mr. Christie has taken on a merchant banking and investment management role. Mr. Christie is a member of the PDAC convention planning committee. He received a Bachelor of Science in Geology from McMaster University in 1986, is a Professional Geoscientist with APGO and NAPEG, and a fellow of the Geological Association of Canada.
Cecil D. Andrus – Director Emeritus
Previous four-term Idaho governor and former U.S. Secretary of the Interior, Mr. Andrus has served on the boards of Albertson’s, Key Bank and Coeur d’Alene Mines Corporation since leaving office in 1995. He currently is “of counsel” to Gallatin Public Affairs, a northwest based public affairs firm and chairman of the Andrus Center for Public Policy at Boise State University. Governor Andrus is known for his strong environmental stance on mining and believes the Idaho Cobalt Project to be an environmentally conscious mining operation.