Grandich Client Update - Formation Metals

Last Friday's news (May 07, 2010, Formation Metals Raises $10 Million) from FCO seems to have fallen on deaf ears. Their initial news release dated March 18th proposed an $8.6 million financing to be done at $1.50 -- when their stock closed that day at $1.43. Formation was still able to close these latest private placement offerings at $1.50 when their stock closed at $1.25 -- basically at a 20% premium to the market. No doubt there was pressure on them to reduce the offering price to close the financing sooner.

FCO's financing consisted of $8 million raised through an unsecured (convertible @$1.50) debenture and $2 million raised in a $1.50 unit offering. Of course they could not have anticipated the financial riots in Greece and the previous day's largest loss ever of the Dow in the course of a trading day. The timing of the release could not have been worse and seems to have squashed any momentum the news could normally have created -- but public companies don't have the luxury to pick the timing of their releases when it comes to material news.

Aside from the lackluster performance of FCO's shares, FCO management has come through on their commitments so far -- true to their CEO's quote in their March 16 news release announcing the withdrawal of the previously filed prospectus; "A more viable option is to seek a smaller working capital equity financing during these negotiations and then, once the terms of the debt financing and off-take arrangements are clarified, we can continue with the equity portion of the ICP mine finance. This is exactly what we intend to do. We are confident we can get this project built and deliver the value that we have promised our shareholders." One could read between the lines on this quote and conclude Formation wants to minimize equity issuance at current share prices and plans on doing a larger equity raise at potentially higher prices, most likely in conjunction with a commercial debt arrangement down the road in an effort to limit dilution.

Worthy of note in this last financing news release is the fact that this is an unsecured convertible debenture. This is a crucial aspect of the debenture as it means the debt is not secured against any assets of the Company. This not only protects the cobalt mine and refinery assets, but it also leaves the collateral available for leveraging commercial bank debt financing which is expected to be a key component of the mine financing -- they appear to be thinking ahead about the bigger picture here.

Another bit of information worth noting is that interest on the debenture is payable in cash or shares and the share value is to be calculated at the then current market five day weighted average share price. Thus, assuming the share price can be much stronger as the financing and construction on the cobalt project moves forward, fewer shares will needed to be issued to pay the interest.

Lastly, this debenture can also be paid off at any time at Formation's discretion, albeit with a penalty. This seems to have been worked into the debenture as another means of reducing interest payments and limiting share issuance.

Management has advised me that outside of the equity and commercial debt financing efforts, they are in fact working on several additional financing avenues, all of which, according to FCO, have received considerable interest. These include VPP's (volumetric production payments) as well as off-take arrangements. Both are similar in that they receive cash upfront for a portion of future revenues (VPP's) or cash upfront for a portion of future commodity production (off-takes). More importantly, what both these arrangements appear to do is provide additional assurance for the commercial banks to sign on the dotted line, knowing that other groups have done their due diligence and are betting on Formation's future ability to produce of high purity cobalt metal, including byproduct copper and gold.

Cobalt has been getting a lot of attention post LME listing in February, and has performed well since that time. There is an interesting (and timely) interview published of Gordon Monk by The Energy Report that FCO posted on their website http://www.formationmetals.com/s/CobaltNews.asp . Gordon Monk is a Principal of Performance Capital Advisors in Vancouver, a boutique merchant bank. In that interview Mr. Monk discusses the cobalt markets and the limited amount of players involved. He states, among other things, that he believes there is tremendous opportunity and incentive for investment in primary cobalt users, especially North American based companies such as Formation Metals, which he mentions by name.