Game Far from over for Formation with BNP out of the Picture

• § Commitment by BNP for Credit Support and Issue of US$58.5 Million in Recovery Bonds Terminated without Closing the Debt Financing: Last week, Formation Metals announced that the commitment received from BNP Paribas for the issue of US$58.5 million in Lemhi County Recovery Zone Facility Revenue Bonds for the construction and development of the Idaho Cobalt Project was terminated without closing the debt financing.
• § Clock Ticking on the Lemhi Bonds – November 21, 2011 Expiry Date: Regardless of the reasons behind the termination of BNP’s commitment of credit support for the bonds without closing the US$58.5 million debt financing, FCO is now faced with securing credit support for all, or at least a sizable portion, of the US$58.5 million in Lemhi County Recovery Zone Facility Revenue Bonds by November 21, 2011.
• § Cash Collateralizing the Lemhi County Recovery Zone Facility Revenue Bonds: We believe it is plausible that Formation could use a portion of its (or even the entire) cash balance to collateralize approximately US$45 million in the Lemhi County Recovery Zone Facility Revenue Bonds. In doing so, Formation would secure the tax-free bonds, providing the Company with more time to negotiate with other institutions for a credit support facility and subsequent bond issues.
• § Other Financing Options: Formation has available to it other strategic financing options It could consider, namely: 1) Solid Waste Bonds – Like the Lemhi County Recovery Zone Facility Revenue Bonds, Solid Waste Private Activity Bonds are exempt from Federal taxes; 2) High-Yield Debt – We assume that FCO would be successful in issuing high-yield bonds (using an interest rate assumption of 15%) to bridge its potential financing shortfall; and 3) Off-take Strategic Agreement – We believe there is significant potential for a strategic agreement between aerospace industry participants and Formation, given that the ICP will be the only cobalt producer in the United States and situated in the heart of the U.S. aerospace industry (high purity cobalt is vital to the aerospace industry), one of the fastest growing end markets for cobalt in the coming years.

Valuation: We are maintaining our SPECULATIVE BUY recommendation but reducing our 12-month target price to C$1.50 per share from C$2.60. Our revised target price is based solely on our risked target NAV for the Idaho Cobalt Project. We feel Formation’s shares afford considerable value at current levels relative to both our 12-month target price as well as our estimate of the Company’s break-up value of C$0.79 per share (see