Part III of a May 10 Interview

By Kevin Michael Grace

Q: Over the last year I’ve heard constantly that the prices of gold and silver mining stocks do not reflect the increases in the prices of silver and gold. This still seems to be the case, and in March most junior miners took a shellacking on the TSX. Why?

A: The mining industry, and junior miners in particulars, has become far more difficult for the average person to be involved with. First of all, financial services businesses were commissions driven; now they’re asset gatherers. There used to be lots of what we could call brokers, whose business was based on buying and selling stocks. Some of them would specialize as gold brokers; they would specialize in mining shares and what have you. This change, added to the deep discounting of commissions, took away a large group that used to be in there buying mining shares.

And in the US, there has been regulatory overkill regarding stocks that don’t trade on the NASDAQ or AMEX. Most U.S. brokerage firms now don’t allow solicitation of shares trading on the TSX. A lot of brokerage firms are now stopping unsolicited orders. The other thing that’s hurt the junior resource market is the shortening of the hold time on private placements, down to four months. Too much paper comes back into the market.

Q: I wrote about one of your clients, Abacus, recently. They seem to have all the factors necessary for a successful company, and yet their market cap is $37 million and they trade at 18 cents. I’ve noticed this with other companies as well, and it’s a mystery to me.

A: The other problem is the speculators. Now, with deep discounting of commissions, they can now afford to buy a few thousand shares, and if it goes up a penny, they can sell it and make a profit. This wasn’t possible before. And despite commodities becoming a more legitimized asset class, we’ve not seen any real increase in the overall interest in the mining industry. The percentage of people that own juniors is probably less now than it was 10 or 15 years ago. Case in point: wherever I go to speak at a conference at all it’s always the same dozen or so men and women speaking, the so-called experts. Whereas if you go to a technology or retail industry show, you’ll find dozens if not hundreds of different experts.

In fact, if you talk to people in the industry, they’re expecting to find it even more difficult to attract skilled labour, geologists, mining engineers, etc. At these shows, most people have gray hair like I do. It’s not an industry a lot of young people go into. All of these things, despite great metal increases, have handicapped mining share prices.

Q: Does this suggest companies should get as much institutional investment as they can?

A: That’s a plus and a minus. Yes, you can get one institution to buy a million shares versus a thousand people buying a thousand shares. The problem is that institutional investors are almost always trying to do it through private placements rather than buying in the market. As soon as they do, they’re looking for that mining company to increase retail interest so they can provide liquidity. And they don’t get it for many of the reasons we just discussed. Despite the price increases, institutional investors have not come to the junior market like they were before the financial crisis in 2008. We haven’t had an area play to bring institutions back, although the Yukon gold rush now is the closest we’ve had in quite some time.

Q: Vancouver is arguably the most important mining city in the world, and yet I note that the Vancouver Sun has almost no mining coverage. Considering how important mining is to Canada and given the 82% rise of silver last year and very healthy rise in gold, there is very little national mining coverage in this country. Why not?

A: I think it’s interesting for an American to look at because natural resources are Canada’s second nature. But at the same time the Canadian market itself is not large in terms of potential investors. The industry has never been able to broaden its appeal to increase demand. I’m prejudiced (and I’ll note that they’re clients of mine), but I certainly believe the Hunter Dickinson group of Vancouver is in the top three in the whole world of small to mid-sized mining groups. Yet you can ask American investors, and they’ve never even heard of them. Here’s a group that’s among the best capitalized, best staffed, with the best investors participating in their deals, and they’re hardly known in the US.

This lack of recognition is partly to blame on the industry itself. They’ve never come together to market themselves. Here in the US, retailers, car companies, etc, all have a lobby, association, what have you. The mining industry does have some big conferences, like PDAC, and for that short period the local media will cover it. But there’s never been an active campaign to persuade the investment community of the advantages in investing in junior miners. Of course the juniors don’t have a lot of capital, and what they have they need to expand their own businesses.

Again, I’m prejudiced, but you think investors would notice that there’s no real cobalt producer in North America. The only one that can hopefully become one is Formation Metals. You would think that Americans would start to understand how strategic cobalt is, but you know they don’t. When you talk to people about this company they don’t even know what cobalt does. Yet they’d be the first to tell you that we need green energy; we need to have electrical cars.

Q: What’s your rest-of-2011 forecast for the junior mining sector?

A: The good news is I don’t think we’re going to have a summer swoon, I think we’ve had this swoon already. The people who think the juniors are going to fall 20%, 30%, 40% more are in for a rude awakening. I think two weeks ago we saw the lows in the junior market. I don’t think we’re skyrocketing back up because things do get kind of quiet during the vacation season, but I think we’ve seen the lows, and part of that reason is we’ve seen the lows of the metal prices. At the same time I don’t think we’re anything close to like what you said earlier, to levels that we should be trading at, given where the prices are.

Read Part I

Read Part II

Peter Grandich is the founder of Grandich.com and Grandich Publications, LLC, and is editor of The Grandich Letter, first published in 1984. Grandich Publications, Inc. provides research, analysis, and investor relation services for certain of the companies featured in the articles appearing in its publications.

Formation Will Produce Idaho Conflict-Free Cobalt By 2Q 2012

By Kevin Michael Grace

Critical metals, or green metals, as they are sometimes known, are the minerals essential to the economy of the future. Almost universally, they are in short supply, and production of secure supply is several years away. Formation Metals’ Idaho Cobalt Project is an exception. Vice President of Communications Rick Honsinger nails it down: “We will go into initial production before the end of the second quarter of 2012.”

A geologist, Honsinger was present at the staking of the project in 1995 and the start of drilling in 1997. From the beginning, the project was designed, as Idaho Governor Butch Otter has written, “with environmental protection paramount at every step.” As a result, permitting has been long and arduous. Today, with the goal in sight, Honsinger can’t wait to get started.

“We have the refinery up and running right now,” he reports. “We have all the people in the infrastructure in place, and we’re actually refining silver and gold bullion for our clients there right now. All the operations can act independently of each other, so we will still maintain that operation while we’re shipping cobalt concentrate to our hydrometallurgical complex just outside of Kellogg, Idaho. We want to start mine construction before the end of the second quarter of this year.”

According to a 2007 feasibility study, the project has proven and probable reserves of 2.64 million tons grading 0.559% cobalt, 0.596% copper and 0.48 grams per tonne gold at a 0.2% cobalt cutoff—29.5 million pounds cobalt, 31.4 million pounds copper and 37,000 ounces gold. Inferred resources are 1.12 million tons grading 0.585% cobalt, 0.794% copper and 0.017 ounces per ton gold—13.1 million pounds cobalt, 17.8 million pounds copper and 19,000 ounces gold.

In 2007, the Net Present Value of the project, discounted at 7.5%, was $191.9 million, with a 38% Internal Rate of Return. A 10-year mine life is forecast, with cobalt produced at $7.73 per pound. If inferred resources are considered, a further four years are added. Honsinger notes, however, that the entire resource is contained in the Ram Deposit, which is one of over 20 target zones identified on the property, four of which have hit ore-grade intercepts. He adds, “Ram itself is still open along strike and at depth. Considering all the un- and underexplored zones on the project, it’s quite likely mine life can be easily extended far beyond 14 years.”

World cobalt demand in 2010 was just under 60,000 tonnes. By 2016, this is predicted to rise to over 90,000 tonnes. Demand is driven by increased usage in lithium ion batteries, and soon, in electric vehicles. In addition, cobalt is used increasingly as a catalyst in the desulfurization and in GTL (gas to liquid), the conversion of gas into synthetic diesel fuel. The current cobalt price is about $20 a pound, but Honsinger says, “We can see cobalt easily doing $30 a pound, if not more.”

As it turns out, the cobalt produced in Kellogg will be ultra-high grade (over 99.8%) and sold at a premium for a different purpose: superalloys. Honsinger explains, “I’m referring specifically to the moving parts of jet turbine engines. Both land and air based.”

Superalloys account for about 19% of world cobalt consumption. The United States accounts for about 58% of world consumption, and, as Honsinger points out, “They have no domestic source.” Needless, to say, America is a significant producer of jet turbines for military and civilian use.

Accordingly, companies are lining up for Formation’s cobalt. “I can’t name them just yet,” Honsinger says. “We’re under confidentiality agreements, but they’re the companies you would expect to see in the aircraft industry.”

Formation’s cobalt is premium for another reason—it does not come from the Congo and the other countries in central Africa that produce two-thirds of world supply. African cobalt is sometimes mined by children and the profits from its extraction are used to fund an ongoing, multinational war that is one of the bloodiest in modern history. Both the US Congress and the Securities and Exchange Commission are close to finalizing strict regulation of so-called conflict metals. This is a boon to Formation, for as Honsinger points out, “Our mine is located in Idaho, and it has a secure supply chain. It will produce ethically-sourced, conflict-free, socially-responsible cobalt.”

After a March $80-million equity financing, Foundation has $84.7 million in cash. Production is dependent on access to $77.7 million raised through the sale of tax-exempt industrial bonds. “Before we can access those funds,” Honsinger says, “we need to obtain some form of credit facility to back them. We have engaged BNP Paribas as our mandated lead arranger. They’re currently in the process of the due diligence, which we expect will be wrapped up within five to seven weeks.”

At press time, Foundation had a market cap of $107 million. Late last year, shares reached a high of $2.76; they are now at $1.18. Honsinger argues, “Of course I’m biased, but I think we’re greatly undervalued. But you don’t need to take it from me; you can take it from the independent analyst report by Byron Capital Markets, which was one of the co-lead arrangers of our recent financing. Their report gives us a target price of $2.70 with a buy rating.”

Vancouver’s Critical Metals Symposium Introduces Junior Miners to End User Investors

By Kevin Michael Grace

What are critical metals? According to John Kaiser of Kaiser Research Online, they are “Metals which tend to be incremental but critical inputs to end products whose total value vastly exceeds their costs.” Not exciting? How about this, then? They are metals critical to photovoltaics, electronic manufacturing, catalytic converters, alloys and magnets. Still not impressed? OK, let’s just say they are metals critical to the production of everything from HD TVs to steel, from cell phones, electric windmills and car batteries to lasers and other top-secret military devices.

Specifically, they include the 17 rare earth elements, as well as cobalt, vanadium, manganese, tungsten, molybdenum, tantalum and lithium. As Kaiser says, “They used to be called minor metals, but they are not so minor anymore.” Especially as exploding demand coupled with China’s decision to end rare earths exports has resulted in a, well, critical shortage.

And it is precisely this shortage that the Critical Metals Investment Symposium, to be held at Vancouver’s Pan Pacific Hotel, January 21 to 22, has been devised to alleviate. It is, according to organizer Cambridge House International Inc, “the first conference in the world to bring together the multitude of parties involved in finding solutions to the developing world crisis in the supply shortage of rare earth and strategic metals.”

Cambridge Chairman Joe Martin says, “The purpose of this conference is to show the end users [i.e., the industrial, consumer and military entities that use critical metals] that there is an entire industry in Canada, the junior resource industry, which taps into the capital markets for sourcing and developing these metals which the big mining companies cannot be bothered with because their markets are too small and complex. The hope is that as these juniors demonstrate the solutions they have to this problem, capital will come in from downstream sources and invest in these companies to help bring deposits to the market and solve this security of supply problem.”

At press time, 28 mining companies (25 TSX or TSXV listed) are signed up as exhibitors. Speakers include Shigeo Nakamura of Advance Material Japan Corp, Cheng Zhanheng and Lin Donglu of the Chinese Society of Rare Earths, Jaakko Kooroshy of the Hague Centre for Strategic Studies and Jim Powell of Laurentian Bank Securities. Martin won’t reveal the attendees, but they are thought to include representatives of the major American computer software and hardware companies.

Vancouver is the ideal host for this conference, because, as Martin points out, “60% of all minerals exploration in the world is done by Canadian companies, with two-thirds of those headquartered in Vancouver.” John Kaiser, who is also a speaker, argues that the race to find new sources of critical metals will be a boon to Canadian companies due to the implications of the Dodd-Frank Act, signed into US law by President Barack Obama in July 2010. This law, Kaiser explains, stipulates that “There must be a chain of command confirming that the supply of minerals is ‘conflict-free.’ So if end users get their tantalum from a mine in Canada, they can demonstrate it is clean, mined in a country whose environmental standards are the highest in the world, as opposed to being mined in the killing fields of the Congo, basically through a form of slave labour.”

Martin notes that one Vancouver junior, FCO:CA Metals, has already benefitted greatly from Dodd-Frank. The Democratic Republic of the Congo produces 40% of the world’s cobalt, which is now effectively banned in the US, while FCO:CA has found a deposit in Idaho. As a result, its share price has gone from about 75 cents in September to about $2.40 today.

Another Vancouver company set to benefit is Commerce Resources, which has a major tantalum-niobium deposit in BC. President David Hodge says of the conference, “This is the first time the end user has been invited to meet the explorers. And cell phone users, anybody who drives a car or flies in an airplane, they all have an interest in solving the critical metals problem. Specifically, Sony, Panasonic and the other big brands need a supply of critical metals.”

Hodge concludes, “Without this ethical supply, companies will not be able to satisfy consumers. The people of the world are saying that we will no longer put up with the rape, pillage and murder that is happening in the Congo and Rwanda in order to supply our lifestyles.”