Building North America's Next Primary Cobalt Mine

May 29, 2015

President's Letter to Shareholders

Dear Fellow Shareholders,
In our last Letter to Shareholders we provided an overview of the 2015 fiscal year which focused on the many positive developments the Company had experienced throughout the year. As our 2015 Annual General Meeting on June 25th is fast approaching, we want to take this opportunity to provide our shareholders with a corporate development update as well as invite you to attend the meeting. Enclosed are the related meeting and voting proxy materials, please feel free to contact us if you have any questions. Your ownership in the Company is important, we encourage all our shareholders to vote.
It has been quite an exciting year for your Company. We are optimistic about the future of the cobalt markets and how a substantial increase in cobalt demand, particularly from the battery sector, could positively impact our Idaho Cobalt Project (ICP). Last month we announced positive economics in our Preliminary Economic Assessment (PEA) which is a significant milestone in the advancement of the ICP towards feasibility and production. We believe that the decision to shift from producing high purity cobalt metal to cobalt sulfate positions our Company and its shareholders to capitalize on the expanding battery sector.
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 utilizing a 0.25% cobalt cut-off for stope design. Please visit our website to view the full SEDAR filed PEA Technical Report.
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 will produce approximately US$140M worth of copper sulfate and approximately US$55M of magnesium sulfate. We are currently in the investigative stages of pursuing potential off-take agreements for all the ICP products.
The positive results of the PEA and recommendations from our independent engineering consultants have given our Company a clear mandate to move the ICP towards feasibility. The results from ongoing metallurgical test work suitable for a feasibility study are expected in our second fiscal quarter (August 31, 2015). Current quotes are being assessed for project advancement and marketing campaigns are being organized and scheduled.
2015 Cobalt Development Institute Conference (CDI)
We recently had the opportunity to present an update on the ICP to the members of the Cobalt Development Institute at the annual conference held this year in Toronto. The CDI conference is the only exclusive cobalt conference in the world and is always well-attended by world cobalt industry experts.
CDI Conference - Supply Deficit Looming Sooner than Later
A new cycle of undersupply in cobalt "is about to begin" (CRU consultant Peter Searle)
Our presentation was well received and there was much excitement about our new ICP product, cobalt sulfate heptahydrate and the potential for the ICP to be the only new, near term primary producer of cobalt in the United States. Conference presenters were almost unanimous on the potential for increasing cobalt prices due to the increased demand from the expanding battery sector (representing 42% of all cobalt consumed). Cobalt as a technology enabling metal, is critical in supporting the global innovation platform and the green agenda being followed by many countries and companies. Sentiment at the conference was upbeat with cobalt market experts predicting that the anticipated cobalt supply deficit will occur in 2016 as opposed to the previous estimate of 2017 (source: CDI 2015).
And it All Started Early Last Year...
As has been stated in numerous publications in particular, Benchmark Mineral Intelligence "The excitement in the battery sector escalated last year with Tesla Motors' announcement of building the world's largest battery factory, the "gigafactory".
The news sparked a revival of interest in companies supplying the raw materials for the lithium ion batteries such as cobalt, lithium and graphite as the gigafactory being built in Nevada has the potential to double the current world lithium ion battery production thereby doubling the demand for the raw materials required."
Since Tesla's announcement there has been an additional five new battery factories planned and under construction. This is expected to substantially increase the demand for raw materials such as cobalt which will drive the supply into deficit much sooner than the previously predicted 2017. As reported by Simon Moore of Benchmark Mineral Intelligence, "The lithium-ion battery megafactories are coming and they will require a substantial new supply of raw materials. While these megafactories will have more negotiating power in their contracts for industrial metal sourcing, they will not be able to create this supply out of thin air." As Mr. Moore states, "Tesla has already stated that they intend to source their raw materials as locally as possible whereas over half of the world's cobalt supply originates from the Democratic Republic of the Congo. This creates an interesting dynamic and playing field". A playing field we believe our company and our ICP is well positioned to participate in.
We believe we are in the midst of a "positive perfect storm".
We have no long term debt and we have a solid cash position.
We have a new team,
We have a new product and
We have a unique commodity which is in strong demand.
The ICP, being located in the western United States and proximal to the Gigafactory, offers a unique potential supply of ethically sourced and environmentally sound cobalt for US consumers.
If you would like further information or wish to sign up for email updates please contact us at 604-682-6229 ext. 228, or please email us at All 2015 AGM materials have been posted on our website.
This will be an exciting year ahead and on behalf of the management team at Formation Metals Inc., I want to thank you, our shareholders, for your continued support.
Signed "J. Paul Farquharson"
J. Paul Farquharson
President & C.E.O.
The ICP remains the sole, near term, fully environmentally permitted, primary cobalt deposit in the United States.
E.R. (Rick) Honsinger, P.Geo., Vice President of the Company, is the Qualified Person as defined by National Instrument 43-101 who has supervised the preparation of this letter and has approved its contents.
The Company cautions that the PEA discussed in this letter is preliminary in nature, and is based on technical and economic assumptions which will be evaluated in further studies. The PEA is based on the current (as at March 10, 2015) ICP estimated resource model, which consists of material in both the measured/indicated and inferred classifications. Inferred mineral resources are considered too speculative geologically to have technical and economic considerations applied to them outside the scope of a PEA. The current basis of project information is not sufficient to convert the mineral resources to mineral reserves, and mineral resources that are not mineral reserves do not have demonstrated economic viability. Accordingly, there can be no certainty that the results estimated in the PEA will be realized. In addition, this letter contains "forward-looking statements" within the meaning of applicable Canadian securities legislation. Statements in this letter pertaining to projected revenues and cash flows, quantity and grade of mineralized materials, estimated mineral prices and the continued expansion of the market for battery grade cobalt chemicals are forward-looking statements. These forward-looking statements are based on assumptions and address future events and conditions and are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Many of the assumptions respecting projected revenue, cash flow and quantity of mineralized materials will be set out in detail in the Preliminary Economic Assessment. Such projections are and will inevitably always be dependent on assumptions about future mineral prices and development costs which will be subject to fluctuation due to global and local economic conditions. This letter also contains forward-looking statements respecting the growing demand for battery grade cobalt chemicals, which demand may or may not continue to grow depending on consumer habits and technological developments. Further information regarding risks and uncertainties which may cause results to differ from those contained in forward-looking statements are included in filings by the Company with securities regulatory authorities and are available at Although the Company has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. The Company does not undertake to update any forward-looking statements that are contained herein, except in accordance with applicable securities laws. The statements contained in this letter in regard to Formation Metals Inc. that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including Formation Metals Inc.'s beliefs, expectations, hopes or intentions regarding the future. All forward-looking statements are made as of the date hereof and are based on information available to Formation Metals Inc. as of such date. It is important to note that actual outcome and the actual results could differ from those in such forward-looking statements. Factors that could cause actual results to differ materially include risks and uncertainties such as technological, legislative, corporate, commodity price and marketplace changes.
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