PROJECT UPDATE: Dundee Prepared to Block Formation’s Refinery Sale

After surprising investors last month by halting work at its flagship Idaho cobalt project, Formation Metals (TSX:FCO,OTCQX:FMETF) has now made another unexpected move. The company announced last Thursday that it has entered into a binding letter agreement to sell its Sunshine Precious Metals Refinery, copper refinery and some land at its Big Creek Hydrometallurgical Complex to Waterton Global Resource Management for US$9 million.

While Formation said that with the pause in work at its Idaho cobalt project it would be using the refinery to generate cash, it has now determined that doing so would require “substantial capital expenditures, sufficient working capital, a hedging program and the ability to provide provisional payments.” In the current market, the company does not believe those are requirements it can meet.

Elaborating further, Rick Honsinger, vice president of corporate communications at Formation, commented to Minesite.com’s Ryan Jackson, “[w]e felt the timing wasn’t there. The refinery needed a relatively significant injection of capital in order to get all the circuits running up at full speed and regardless, despite our best efforts, we didn’t have enough customers to fill those circuits.”

While that statement may sound discouraging, Honsinger also highlighted that the refinery has been “very cash positive” for Formation, explaining, “[w]e paid US$1.275 million for the refinery and a few years later we sold the tailings pond for US$4.6 million. Now we’ve sold the remaining portion of the facility for US$9 million. It’s actually US$13.6 million in cash that we’ve gotten back out of a US$1.275 million initial investment — and since the commencement of commercial operations in 2007, the refinery did report total positive earnings of close to C$3 million.”

However, not everyone thinks the sale is such a good idea. Yesterday, Dundee (TSX:DC.A), which says it is Formation’s largest known shareholder, revealed that it is prepared to take legal action to block the deal on the basis that the sale and sale price are “improvident and not in the best interest of Formation and its shareholders.”

Specifically, Dundee believes the sale “requires the approval of the Formation shareholders” and plans to move against the company if it goes forward without attaining that approval.

Formation’s annual general and special meeting of shareholders is scheduled for June 21, 2013, the day after the refinery sale is set to close. Investors should stay tuned to see how the situation progresses.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Editorial Disclosure: Formation Metals is a client of the Investing News Network. This article is not paid-for content. 

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